Over the last few years, many investors have learned the hard way that a huge dividend yield isn't always sustainable. In the telecommunications space, there have been several significant dividend cuts, and for well over a year Windstream Holdings' (NASDAQ:WINMQ) dividend has teetered on the brink of being cut. While the company consistently talks up the sustainability of the dividend, if certain trends continue this high-yield will have to fall.

A troubled business
It's no secret that the local telecom business has been difficult. Many smaller carriers have merged or been bought out in hopes that the larger survivors can prosper. However, a large part of each of these companies business is landline telephones that are going the way of the dinosaur.

If landline losses were limited just to Windstream then investors could choose to ignore the company and move on to a different stock. However, from Windstream's landline losses of 6%, to Frontier Communications (OTC:FTR) decline of nearly 9%, or AT&T (NYSE:T) losing more than 11%, the whole industry is decaying.

The difference between say Frontier and AT&T compared to Windstream is, the former two companies seem to be growing the businesses they are supposed to, whereas Windstream is not. For instance, in high-speed Internet subscribers Frontier witnessed an increase of 5% on a year-over-year basis, while AT&T generated a 6% gain. By comparison, Windstream lost 3% of its Internet subscribers.

Video customers are another growth opportunity that both Frontier and AT&T capitalized on, while Windstream did not. Frontier added 15% more video customers, while AT&T added 3.5% to its U-Verse TV service. Windstream on the other hand, reported digital video customers declined 5% year-over-year.

In part because of Windstream's struggles with voice line losses, high-speed Internet losses, and video losses, the average analyst expects EPS to decline by about 20% annually over the next five years.

The numbers don't lie
While it's true that over 90% of Windstream's core free cash flow (net income + depreciation-capital expenditures) comes from depreciation, a 20% decline in net income is never a good thing. In addition, the company's depreciation is being depleted by about 2% per quarter over the last year or so.

While Windstream has cut its capital expenditures, even if the company maintains this lower level, the dividend could still suffer. Unfortunately, Windstream has been increasing its share count by about 1.5% annually and of course with more shares comes more dividends. If these trends continue, here is what Windstream investors can expect.


Net Income



Core Free Cash Flow



Payout Ratio

*Q1 2014

$31.3 mil.

$331.6 mil.

$194 mil.

$168.9 mil.

596.1 mil.

$149 mil.


*Q2 2014

$29.6 mil.

$325 mil.

$194 mil.

$160.6 mil.

598.2 mil.

$149.6 mil.


*Q3 2014

$28 mil.

$318.5 mil.

$194 mil.

$152.5 mil.

600.3 mil.

$150.1 mil.


*Q4 2014

$26.5 mil.

$312.1 mil.

$194 mil.

$144.6 mil.

602.4 mil.

$150.6 mil.


*Q1 2015

$25 mil.

$305.9 mil.

$194 mil.

$136.9 mil.

604.5 mil.

$151.1 mil.


(*projections = 20% annual decline in net income-2% linked quarter decline in depreciation - stable capex of roughly $194 mil. per quarter  - 1.4% annualized increase in shares)

The bottom line is, Windstream's core free cash flow payout ratio would rise more than 100% by the fourth quarter of 2014.

What can the company do?
If Windstream wants to successfully defend its dividend, there are several steps the company must take. First, a company with troubled cash flow can't issue new shares. Considering that Frontier's diluted share count stayed essentially flat, and AT&T actually retired 7% of its shares, its much easier to believe in these dividends than Windstream's payout.

Second, Windstream must find a way to keep its capital expenditures stable or decrease these expenses even further, this would help lower the company's payout ratio. Last, the company must find a way to at least retail its high-speed Internet and video customers. If CenturyLink, AT&T, Verizon, and Frontier can do this, then so can Windstream.

The bottom line is, Windstream is already in a very difficult position, and without a major turn in the company's fortunes, the dividend seems to have a year at these levels at best.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.