Investors in Windstream (Nasdaq: WIN) shouldn't be fazed too much by the company's fourth-quarter earnings report. Yes, full-year revenues actually declined 0.3%, and yes, the company took a quarterly loss of $31.9 million compared to a $56.6 million gain from the same quarter last year. But without the one time $163 million pension-plan accounting charge, Windstream would have earned $0.19 per share, compared to the $0.10 per share earned in Q4 2010.
Actually, Windstream investors should be encouraged by the company finalizing its acquisition of national service provider PAETEC in early December. That $2.3 billion purchase -- which had some shaky moments -- has turned the company into more than a regional phone and Internet provider. It now has 115,000 miles of fiber network it can use to reach customers in 48 states and the District of Columbia.
"PAETEC was a very important acquisition for us," said Windstream CEO Jeff Gardner during the company's fourth-quarter conference call. "We're more of a national player today, and we can go in and get to customers that previously we couldn't … [The] PAETEC deal positions Wind to grow in the business space and was an absolute great strategic fit."
The PAETEC deal, along with Windstream's earlier acquisitions of D&E Communications, Iowa Telecom, NuVox, Lexcom, KDL/Norlight, and Hosted Solutions, has opened up new areas for company growth, such as cloud computing, data centers, and business services.
Welcome to the show
Even though the company's history has been as a phone and Internet provider for many rural regions that do not have competing companies, it -- like many other telcos -- has been consistenly losing its phone customers over the last decade, as wireless phone service and voice-over-Internet have become more popular. To counter this trend, Windstream has been strongly pushing Internet access, business which is now 65% the size of its voice-customer base. However, voice customers are particularly profitable and are dearly missed because, besides making their own payments, they garner access money and lucrative subsidies from other carriers.
But now that Windstream has gone national, it's going to be playing with the big boys. It will have to compete with the likes of AT&T (NYSE: T) and Verizon (NYSE: VZ) for business customers. During the conference call, Windstream COO Brent Whittington responded to a question about the company's new national footprint by saying, "Yes, we can compete with an AT&T and Verizon, but [ … the size of the business Windstream is going for is … ] not really a sweet spot where those folks can focus."
Debt and dividend
A downside to the acquisition path Windstream has taken has been to increase its debt load to 3.7 times OIBDA. This is high, and reducing that debt will eat into the bottom line, probably for several years to come. The company's commitment to keep providing a dividend with the current attractive dividend yield of around 8% will also keep available cash down.
Regarding that dividend, CEO Gardner said during the conference call: "[W]e are very committed to our dividend … Windstream is well positioned to easily maintain our dividend and consider other shareholder-friendly activities to enhance returns in the future."
Beware
Frontier Communications (Nasdaq: FTR), another high-dividend-yielding telecom, had to cut its dividend in half despite fourth-quarter earnings that came in above expectations. That company had incurred a heavy debt load when it bought $8.5 billion of Verizon's unwanted rural phone lines in 2010. It also didn't help that for the year, Frontier had an impossibly thin dividend-to-free-cash-flow-payout ratio of 99.8%.
But Windstream's margin of dividend safety isn't much thicker at 96.7%, and this could be a real problem if management can't turn any efficiencies it has gained from its acquisitions into increasing its operating margins. If Windstream can pull off its tight-wire act of increasing the services it provides and paying off its debt, all the while still maintaining a high dividend, maybe in a couple of years it will become a true national player. This is a company to keep an eye on.
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