It seems that every few weeks, we see someone writing that Windstream (WIN +0.00%) will soon be forced to reduce its dividend. Yet quarter after quarter, the company declares its same high-yielding dividend. I understand the common refrain that past performance does not guarantee future success, and the problem of induction is clear here. But why does the company continually beat the widespread belief that the dividend is unsustainable?
Management makes dividend a priority
Windstream's management has continued to stress that the dividend is very important. Knowing that management has the dividend as a top priority is a key element in predicting future results. The following are some steps Windstream's management has taken to ensure sustainability of the dividend:
1. Reduced capital expenditures
For 2013, adjusted capex was reduced by 23% and then by 37% in the fourth quarter of 2013 versus the fourth quarter of 2012.
2. Restructured debt to decrease interest expense
Interest expense for the last quarter of 2013 declined by almost $12 million, a savings of 7% compared to the fourth quarter of 2012.
3. Increased free cash flow
For 2013, adjusted free cash flow came in at $891.3 million, representing a 16% increase compared to 2012.
4. Improved dividend payout ratio
It once again maintained its dividend at $0.25 per share for the fourth quarter of 2013. This resulted in $593.6 million being paid, representing a dividend payout ratio of 67%, which shows solid improvement over the 77% ratio for 2012.
With this improved position, I believe the dividend is sustainable for the foreseeable future.
Pressing problems still need to be addressed
Despite its improved position in its dividend payout ratio, the company still has some very pressing problems to solve.
As the legacy landline business model continues to fade, the rural telecom companies have focused on business customers, broadband, and video for growth. Windstream's disappointing performance in these areas is cause for concern.
Frontier Communications (FTR +0.00%) saw the number of its business customers decline by 5.5% for the year, and Windstream lost roughly 7%. Windstream reported a revenue increase of 1% for its business customers ,which means the company is making up for its loss of customers by charging more. This is not a sustainable model for growth.
Windstream is also not growing its customer base in broadband or video. It lost 4% of broadband customers for the year and 6% of its video customers. Frontier, on the other hand, increased the number of broadband customers by 6.4% and growth of 11% in video customers.
This growth in customers in the broadband and video segment is good news for Frontier, but the company is still seeing declining revenue. Investors should look at Frontier going forward to see if the company can turn the rise in broadband and video customers into revenue growth. Until then, I am a skeptical of Frontier.
Another legacy telecom that is seeing a slight rise of customers is CenturyLink (CTL +0.43%). The company has seen revenue growth in its strategic services of 4.7% compared to Windstream's 2%. Total revenue saw a 1.5% drop, which beat Windstream's 2% drop.
What is somewhat surprising about CenturyLink is that it has seen some growth in its legacy voice customer base. But it was still not enough to see total revenue growth, as the company saw a 1.5% revenue decline for the year.
Dividend makes Windstream most attractive
While Windstream is facing serious problems in growing its business customer base and turning other strategic services into strong growth, its dividend makes it an attractive stock.
Windstream's peers are facing the same headwinds and are not performing much better, or worse, than Windstream. The sustainability of Windstream's dividend going forward makes it an attractive stock in general and certainly more attractive than its legacy telecom peers.
