Rural telecom Windstream (NASDAQ:WIN) is a veritable cash machine. Amid declining voice and long-distance sales, the company has become a major provider of broadband data connections, extracting 69% of its revenue from that operation. Steady subscription fees from 3.5 million consumer accounts and 650,000 business customers ensure a rock-solid revenue stream. At the other end, Windstream marshals it all into massive cash flows:
Windstream isn't shy about sharing the wealth. The 11.1% dividend yield is currently the second-richest payout in the S&P 500, trailing only Pitney Bowes (NYSE:PBI) at 13.8%.
So this is arguably the fattest dividend in the telecom sector. But bigger isn't always better. Double-digit dividend yields are a siren call to income investors, but often a red flag as well. As it turns out, Windstream's payouts aren't exactly rock-solid.
I'll give you the bad news first: Windstream hasn't increased its dividend payouts per share since 2007. Today's towering yield is a product of sinking share prices -- not bigger dividend checks. The quarterly bill for dividend payments has jumped, though -- Windstream issued 70 million new shares to acquire data center operator PAETEC last year, boosting the share count and total dividend payments by 14%. Right now, Windstream has to dip into cash reserves to foot the dividend bill.
Hence, this is far from the safest high-yield payout in the tech and telecom spaces. Fellow rural telecom Frontier Communications (NASDAQ:FTR) spends just 67% of its free cash flows to generate a solid 8.7% dividend yield. Hard drive maker Seagate Technology's (NASDAQ:STX) 5.5% yield is supported by just 12% of its free cash flows. Those guys would let you sleep at night.
That being said, there's good news, too. Windstream's transformation into a high-speed data pipe for bandwidth-starved rural customers is a terrific strategy, and the PAETEC buyout shows how seriously the company is attacking high-margin corporate clients. The current cash crunch may very well be temporary, leaving room for stable or even rising dividends in years to come.
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