Windstream (WINMQ) will release its quarterly report on Thursday, and even though the company has already declared its quarterly dividend at current levels, investors still worry whether the rural telecom will be able to sustain its lucrative double-digit payout yield in the long run. With a yield that even eclipses those of rivals Frontier Communications (FTR) and CenturyLink (LUMN -0.93%), Windstream faces the constant challenge of producing enough earnings and cash flow to support payouts while keeping its balance sheet healthy in an industry that has a history of declining revenue.

The appeal of Windstream, Frontier, and CenturyLink's business model is that older legacy assets such as landlines produce substantial amounts of cash without a huge amount of investment. Yet the popularity of these services is in steady decline, forcing Windstream and its peers to find ways to get current customers to tap into other, more profitable services including broadband Internet and video. Frontier and CenturyLink have both reduced their dividends in the past as a reflection of the natural decline in their respective businesses and to preserve cash for other purposes, but Windstream has thus far resisted that impulse. 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.

Image courtesy Chas Redmond, via Wikimedia Commons.

Stats on Windstream

Analyst EPS Estimate


Change From Year-Ago EPS


Revenue Estimate

$1.50 billion

Change From Year-Ago Revenue


Earnings Beats in Past 4 Quarters


Source: Yahoo! Finance.

Will Windstream earnings satisfy investors?
In recent months, analysts have been a bit more cautious about Windstream earnings, keeping their fourth-quarter estimates steady but cutting their full-year 2014 projection by $0.02 per share. The stock has mostly held its own, falling 1% since mid-November.

Windstream's third-quarter results were consistent with the declining nature of its older businesses. The company emphasized growth in business services and consumer broadband revenue, with business data and integrated services sales rising 5% on a 6% jump in the number of enterprise customers generating more than $750 in monthly revenue. Those results only partially offset a 3% decline in overall consumer service revenue, and even though adjusted free cash flow climbed by more than half from year-ago levels, investors were disappointed with the results. The stock also got downgraded after the report, with Morgan Stanley citing fears about dividend sustainability.

A big problem for Windstream is that it lags behind rival Frontier in capturing greater numbers of subscribers for its higher-value offerings. Even as Frontier managed to add net subscribers to its high-speed Internet and video services, Windstream saw declines. CenturyLink has even managed to do well holding onto its voice customers while getting people to sign up for other services. Meanwhile, AT&T (T 2.15%) has also had success in luring customers to its higher-margin offerings, posing a potentially larger challenge given the company's greater name recognition across the country. Frontier's deal to acquire AT&T's Connecticut-based landline and fiber assets will also make Frontier a larger force to be reckoned with in the telecom space.

In the long run, Windstream also must address its balance sheet. With a debt-to-equity ratio that far eclipses Frontier and other industry players, Windstream is vulnerable to rising interest rates, although it has taken steps to refinance and take advantage of relatively low rates now. Even though the company assures investors that its cash flow is substantial enough to cover dividends, the amount it pays out is dangerously high compared to the money it's bringing in, especially relative to the Frontier dividend that has been reduced in recent years. Measures such as Windstream's recent decision to lay off 400 workers should help on that front, but continued efforts will be needed to ensure that the telecom can keep its expenses in check and retain more of its hard-earned cash to pay to shareholders.

In the Windstream earnings report, watch to see how the company plans to keep bolstering its business services and its higher-margin consumer broadband and video offerings. Without more success on those fronts, Windstream will see increasing pressure on its dividend in the years to come.

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