Windstream (NASDAQ:WIN) will release its quarterly report on Thursday, and investors are once again expecting earnings to fall short of the amount that the rural telecom is paying out in dividends. Yet unlike rivals Frontier Communications (NASDAQ:FTR) and CenturyLink (NYSE:CTL), Windstream has thus far managed to avoid cutting its dividend, and that puts the stock at the top of the list for the highest-yielding member of the S&P 500.

Windstream has faced the same challenges as CenturyLink and Frontier, with its rural telecom customers having been somewhat slower in giving up old-fashioned services like landline-based phone service in favor of wireless phones. Yet slowly but surely Windstream and its peers have seen those voice customers start to wane, and efforts to retain customers with broadband Internet and video offerings have produced only mixed results. Nevertheless, Windstream appears committed to keeping its dividend at current levels as long as possible. Let's take an early look at what's been happening with Windstream over the past quarter and what we're likely to see in its report.

Stats on Windstream

Analyst EPS Estimate


Change From Year-Ago EPS


Revenue Estimate

$1.51 billion

Change From Year-Ago Revenue


Earnings Beats in Past 4 Quarters


Source: Yahoo! Finance.

Can Windstream really sustain its dividend?
In recent months, analysts have gotten even less comfortable with Windstream earnings, cutting third-quarter estimates as well as full-year 2013 and 2014 projections by about 10%. The stock hasn't done much all year long and is up about 1% since early August.

Windstream's second-quarter results revealed the problems that the telecom company is dealing with. From voice to digital television and high-speed Internet, Windstream lost customers in all three of its major segments. The resulting 22% drop in net income raised even further concerns about its dividend, especially in light of the fact that Windstream makes so little income that the majority of its payout gets reclassified for tax purposes as return of capital.

One area where Windstream lags badly behind its peers is in debt management. It spent more than 70% of its operating income to cover interest expense in the second quarter, compared to about 62% for Frontier and 45% for CenturyLink. Given how low prevailing interest rates are in the credit markets, Windstream's inability to reduce debt-maintenance costs any further shows just how deeply indebted it is. Moreover, the high-interest expense makes it harder for the company to reduce debt, resulting in a potential downward spiral that could get worse if interest rates start to rise again.

Windstream's biggest hope is that its efforts to become a bigger part of the cloud-computing market will bear fruit. The company has opened several data centers in key strategic locations, with an announcement in June that it would build a fourth enterprise-class data center in Charlotte. With similar data centers in place or planned for Virginia, Tennessee, and elsewhere in North Carolina, Windstream hopes that it will be able to meet customer demand for cloud-based services and find growth to replace its other flagging segments.

In the Windstream earnings report, look closely to see if the company has any success in turning any of its major segments around. Without some positive results, it'll be increasingly difficult for Windstream to sustain its dividend in the long run.

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