Investors who own a stock with an almost-11% yield need to be hyper-focused on whether that yield is sustainable. Windstream Holdings (NASDAQ:WIN) has repeatedly said it is focused on keeping its dividend, and investors want to believe that. However, there are three questions investors should ask, but they may not like the answers.

How do you transform while sliding down a hill?
Windstream's management says that it wants to transform into an enterprise-focused company. That sounds good, but the company can't ignore the rest of its customers. In the local telecom industry, CenturyLink (NYSE:CTL) appears to be setting the standard. Of the three big local companies, only CenturyLink reported either flat or positive growth in both its residential and business divisions.

By comparison, Frontier Communications (NASDAQ:FTR) reported a decline of at least 3% in both residential and business revenue. Windstream reported a 4% decline in its residential business, but the larger business division reported flat revenue growth on a year-over-year basis.

On the surface, it would seem that Windstream did well to just maintain its business revenue, but behind the numbers there is a far more troubling trend. Windstream reported that total business customers declined by 5%. So, the first question facing Windstream is, how do you transform your business when your customers are leaving?

Though revenue growth was flat, customer losses means that Windstream raised prices to offset these lost customers. In an industry that is essentially a commodity business, raising prices while losing customers would seem to be a sure way to fail in the long-run.

These measures are rising and that's not a good thing
The second question investors need to ask is, how long can Windstream support its dividend while debt and interest are rising? On a relative basis, Windstream carries significantly more debt compared to its peers. CenturyLink shows the least relative leverage with a debt-to-equity ratio of just 1.2. By comparison, Frontier's debt-to-equity ratio sits at almost 2. Windstream takes debt to a whole new level with a debt-to-equity ratio of almost 12.

It would be one thing if Windstream carried more debt and was growing faster, but that isn't happening. Even more disturbing, Windstream's interest cost as a percentage of operating income is higher than its peers as well.

In a not surprising turn, CenturyLink carries lower interest as a percentage of operating income at 49%. While Frontier carries a bit higher interest percentage at 76%, Windstream again takes this to a whole new level at 85%. So, it's not hard to imagine that a company paying more in interest could run into trouble supporting its dividend.

Don't assume this is for real
Windstream investors are likely clinging to the fact that the company's core free cash flow payout ratio came in at less than 75%. For a company that spent the last year or so with a payout ratio over 100%, 75% must look much better.

However, the third question investors need to ask themselves is, what will happen to the company's payout ratio under normal capital expenditures? CenturyLink and Frontier already boast much lower payout ratios at 48% and 54%, respectively. The difference between Windstream and these two gets much larger when you consider the company's plans for capital expenditures in 2014.

Windstream has already said it expects to spend between $800 million-$850 million on capital expenditures this year. In plain English, Windstream spent 30%-40% less on capex in the current quarter than it intends to for the year. This means the company's roughly $200 million in core free cash flow wouldn't be the same under normal circumstances.

If nothing else, this is the big risk facing Windstream investors. Under the company's own planned capex for 2014, the payout ratio would rise well above 100%. For a company that carries relatively more debt than its peers, and is losing customers, spending this much on capex may be the final blow to the sustainability of its dividend.


Chad Henage owns shares of CenturyLink. 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.