Windstream Holdings, Inc. Earnings: Solid Progress Toward a Tax-Efficient REIT Future

Source: Windstream.

Windstream Holdings (NASDAQ: WIN  ) reported second-quarter results on Thursday morning. The regional telecom and business-focused data services specialist saw sales fall 2% year over year, landing at $1.47 billion. Windstream grew its list of enterprise customers by 3%, while all other divisions reported annual subscriber shrinkage.

GAAP earnings came in at $0.02 per share, down from $0.06 per share in the year-ago period. Adjusted OIBDA earnings, which is a non-GAAP metric that's closer to an operating cash flow measure than to tax-accounting GAAP income, fell 7%, to $543 million.

Source: Windstream.

Both sales and earnings fell short of Wall Street estimates, as analysts were looking for earnings of $0.06 per share on $1.48 billion in pro forma sales.

In a prepared statement, CEO Jeff Gardner underscored Windstream's focus on business services. "We have expanded our business marketing programs to strengthen sales and are seeing continued solid sales momentum and positive trends supporting our efforts to move up-market," he said.

In the shrinking consumer channel, Windstream is doubling down on marketing and sales efforts, including a number of new discount plans to drive higher subscription volumes.

All told, Gardner called the quarter "solid and largely in-line with our expectations," holding Windstream's full-year revenue and cash flow guidance firm despite the slight misses against Wall Street estimates.

What's next?
These results will soon be tough to use in year-over-year comparisons. At the end of July, Windstream announced plans to split its operations into two separate businesses.

In a spin-off deal that's expected to close in the first quarter of 2015, Windstream aims to set most of its network assets apart in a publicly traded real estate investment trust, or REIT. The service company will lease network infrastructure from the asset entity. The IRS has already approved this move, but Windstream still has a number of regulatory hurdles to clear before making the change.

For Windstream, it's a tax-effective move that would reduce the core company's $8.5 billion debt load by about $3.2 billion, and yield more than $100 million in annual tax savings. To put these savings into context, Windstream's annual income taxes have hovered around $100 million since 2011.

Shareholders will gain the ability to invest in Windstream's service operations or its asset-heavy network business. Both entities are expected to continue paying dividends, but at very different rates. To qualify as a REIT, the networking operation must pay at least 90% of its taxable income in the form of dividends. It should come as no surprise to see Windstream planning an annual dividend payout of $0.10 per share for the service section, and a far heftier $0.60 per share in the networking segment.

So, the Windstream stock you own today is likely to look very different a year from now. Some investors will choose the service track, hoping for a turnaround based on business-class products. If that pays off faster than the landline phone service withers and dies, this option could pay off handsomely.

But that's a high-risk bet. Most investors will simply buckle up for negligible growth, low volatility, and handsome dividend yields in the network assets portion of today's Windstream.

Top dividend stocks for the next decade
The smartest investors know that dividend stocks simply crush their non-dividend paying counterparts over the long term. That's beyond dispute. They also know that a well-constructed dividend portfolio creates wealth steadily, while still allowing you to sleep like a baby. Knowing how valuable such a portfolio might be, our top analysts put together a report on a group of high-yielding stocks that should be in any income investor's portfolio. To see our free report on these stocks, just click here now.

Read/Post Comments (0) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 3065425, ~/Articles/ArticleHandler.aspx, 8/31/2015 5:54:49 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Anders Bylund

Anders Bylund is a Foolish Technology and Entertainment Specialist. Where the two markets intersect, you'll find his wheelhouse. He has been an official Fool since 2006 but a jester all his life.

Hypoallergenic. Contains six flavors not found in nature. Believes in coyotes and time as an abstract.

Follow Anders on Twitter, LinkedIn, and Google+.

Today's Market

updated Moments ago Sponsored by:
DOW 16,528.03 -114.98 -0.69%
S&P 500 1,972.18 -16.69 -0.84%
NASD 4,776.51 -51.82 -1.07%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

8/31/2015 4:00 PM
WIN $7.19 Up +0.16 +2.28%
Windstream Corp CAPS Rating: ***