Windstream Holdings, Inc. Earnings: Going Beyond the Dividend

Everyone's convinced that the rural telecom's dividend is at risk, but do investors have other things they should worry about more?

May 7, 2014 at 1:30PM

On Thursday, Windstream (NASDAQ:WIN) will release its quarterly report, and investors have seen the top-yielding dividend stock as a prime candidate to cut its quarterly payout for years now. Yet, in all the furor over whether Windstream can sustain its dividend, many investors never even ask whether Windstream has competitive advantages over peers Frontier Communications (NASDAQ:FTR) and CenturyLink (NYSE:CTL) that will lead to longer-term business success.

For good or ill, most investors look at Windstream, Frontier, CenturyLink, and other geographically diversified telecom companies from the viewpoint of the dividends they offer. But with many customers in rural areas not having the same access to competitive options for telecom services, Windstream has an opportunity to take traditional landline customers and offer them broadband Internet and other higher-margin services that could produce real growth. However, given the mixed success that Frontier Communications has had lately, can Windstream do better? Let's take an early look at what's been happening with Windstream during he past quarter and what we're likely to see in its report.

File
Image courtesy Chas Redmond, via Wikimedia Commons.

Stats on Windstream

Analyst EPS Estimate

$0.09

Change From Year-Ago EPS

(10%)

Revenue Estimate

$1.47 billion

Change From Year-Ago Revenue

(1.9%)

Earnings Beats in Past 4 Quarters

0

Source: Yahoo! Finance.

Are Windstream earnings stuck in the mud?
In recent months, analysts have been nervous about Windstream earnings, cutting their first-quarter estimates by $0.01 per share, and cutting $0.5 per share from their full-year 2014 projections. The stock has soared, though, rising nearly 25% since the end of January.

Windstream's fourth-quarter earnings showed the tug-of-war that the rural telecom faces in dealing with a declining segment in its landline business. Adjusted earnings per share came in $0.01 short of investors' expectations, although net income jumped substantially from year-ago levels. Revenue was flat, and the company projected a wide range for full-year 2014 revenue guidance, with potential losses of as much as 2.5%, or gains of as much as 1%. Windstream saw some gains in enterprise customer counts, but a drop in small-business customers weighed on its overall segment, and consumer counts for voice, broadband, and TV all fell between 4% and 6% from the year-ago quarter.

Win

Source: Windstream.

Still, dividends are a big issue for Windstream, and many people get confused comparing Windstream's payout with its other financials. If you look merely at GAAP earnings, then you'll get the impression that Windstream's dividend is unsustainably large by comparison. But because telecom businesses have a large amount of asset depreciation to account for that doesn't affect actual cash flow, it's more appropriate to measure Windstream's dividend payout in comparison to free cash flow measures. By that standard, Windstream compares fairly well against CenturyLink, Frontier Communications, and other telecom peers. Windstream expects its payout ratio based on adjusted free cash flow to come in between 68% and 78% in 2014.

Windstream desperately needs to find ways to grow the number of subscribers who buy its Internet and television services, as that has been the key to growth at other companies. Frontier, for instance, saw a 6% jump in high-speed Internet customer counts in the fourth quarter of 2013, compared to a 4% drop at Windstream. In Frontier's first-quarter results announced yesterday, both broadband and video subscribers were up almost 7% from year-ago levels. If Windstream can't match those figures, it'll be hard for it to sustain any sort of growth trajectory, especially as Frontier and CenturyLink both push hard at getting residential and business customers to broaden their subscriptions.

Meanwhile, Windstream has made big strides toward shoring up its financial situation. So far, efforts to refinance its huge debt load have successfully helped Windstream dramatically reduce its interest expenses, even though the high dividend and some share buyback activity have diverted cash that could have been used for debt reduction. With the need to make capital expenditures to improve its network quality and offer new high-margin services, Windstream has to walk a fine line between spending enough and spending too much.

In the Windstream earnings report, watch to see how subscriber counts and revenue figures fare across its divisions. For Windstream to justify its recent gains, it needs to demonstrate that it can take better advantage of its opportunity to capture customers, and have them use more of the services Windstream provides.

Warren Buffett just bought nearly 9 million shares of this company
Imagine a company that rents a very specific and valuable piece of machinery for $41,000... per hour. (That's almost as much as the average American makes in a year!) And Warren Buffett is so confident in this company's can't-live-without-it business model, he just loaded up on 8.8 million shares. An exclusive, brand-new Motley Fool report details this company that already has more than 50% market share. Just click HERE to discover more about this industry-leading stock... and join Buffett in his quest for a veritable landslide of profits!

Click here to add Windstream to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Dan Caplinger has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers