Windstream (OTC:WINMQ) has captured the attention of dividend investors everywhere, with an impressive yield that has persisted for years. But with high income comes substantial risk.
I've been crafting a premium research report on Windstream that goes into more detail about the rural telecom company. Let's take a look at some of the specific risks that Windstream faces right now.
1. Integrating the PAETEC acquisition.
Windstream paid $2.4 billion to acquire PAETEC in 2011. At the time, that move made plenty of sense, as CenturyLink had bought data-center company SAVVIS while Verizon had bought cloud-computing player Terremark. But now, Windstream is banking on the acquisition bringing dividends in the form of synergy-linked cost savings and additional revenue.
The integration hasn't gone without hitches. For instance, early on, Windstream decided not to fight FCC allegations connected to PAETEC's billing practices, instead choosing to adapt its strategy going forward.
So far, though, Windstream still has high hopes on the PAETEC front, having estimated in August 2012 that the reorganization would bring $30 million to $40 million of cost savings as well as $50 million in synergies. As the company continues to execute on billing conversion and other synergy-seeking activities, Windstream needs those benefits to grow. The risk, however, is that unexpected obstacles will lead to the integration process going more slowly than the company hopes. At a critical time from a cash-flow perspective, that's something Windstream can ill afford.
2. Further consolidation within the telecom industry.
Over the past several years, we've seen a big ramp-up in merger and acquisition activity in the telecom space. Although AT&T's attempted takeover of T-Mobile failed, more recent activity involving Sprint, MetroPCS, and other well-known companies in the industry have essentially forced everyone to assess their competitiveness from the standpoint that their rivals may form combinations that could effectively shut them out.
Windstream's focus on business customers could prove to be useful from a defensive standpoint in this regard, as residential customers generally haven't hesitated to jump ship when better deals arise. Windstream's sales force has better prospects of retaining business customers who use a wider range of the company's services. Yet if competitors pick up on the benefits of a business focus, then Windstream could find itself having to defend its turf against incursion from larger industry players.
3. The impact of taxation on dividends.
One factor that was completely out of Windstream's control came from the fiscal cliff crisis, which resulted in substantially higher taxation on dividends in 2013 and beyond for certain taxpayers. In 2012, Windstream shareholders were generally eligible for a 15% maximum rate on the dividends they received. Yet in 2013, the top rate for high-income investors rose to 20%.
Before lawmakers compromised on the measure, finance professor Aswath Damodaran expected that high-yielding dividend stocks could be among the worst hit and could suffer double-digit percentage declines if higher tax rates took effect. For the most part, dividend stocks have shrugged off the news, as the increase was far less than the 39.6% rate that previous law would have implemented. Nevertheless, as lawmakers continue to debate possible further tax increases, shareholders need to be aware of the risk.
Stay tuned for further excerpts from my premium report on Windstream. In the next part of this series, I'll turn to the quality of the leadership team that heads up the company.