Windstream (NASDAQ:WIN) reports earnings soon, and with each new earnings report, the company has a chance to either seal its fate or surprise investors. The stock gets a lot of attention due to its yield of nearly 11%. However, the company has three issues in particular that investors need to pay attention to.

Time to get down to business
As a percentage of revenue, there is nothing more important to Windstream than its business division. The company hopes to become enterprise-focused, as 74% of revenue comes from business sales.

This is a big opportunity for Windstream, as well as other local telecoms like CenturyLink (NYSE:CTL). Business sales for Windstream increased by 0.3% last quarter, but unfortunately, this was a deceleration of growth from the 1% increase in the prior quarter.

Where CenturyLink is concerned, business sales are moving in the opposite direction, as they were flat six months ago, but increased 1% last quarter. Seemingly on the other end of the spectrum is AT&T (NYSE:T), which witnessed a 4.3% increase in consumer revenue, but overall wireline revenue was actually down 0.4%. We can extrapolate from these numbers that AT&T witnessed a decline in business sales.

This is the first issue Windstream investors should watch, as the company must maintain its momentum in business sales and reverse the trend seen in the last two quarters.

A small part of the puzzle, but getting worse by the day
While it's true that Windstream's consumer revenue is a much smaller part of the puzzle than for other telecoms, the company is struggling like none of its peers. Generally speaking, local and major telecoms are looking for growth in high-speed Internet and video to offset wireline losses.

When it comes to Internet and video growth, to say Windstream is in trouble is an understatement.


High-Speed Internet Annual Growth

Video Annual Growth

Voice line Annual Growth













Source: SEC Filings

As you can see, Windstream reported worse results in high-speed Internet and video, and only AT&T did worse in voice line losses. To make things worse, CenturyLink is seeing improvements in its voice line losses, going from a 6% annual decline to a 5.4% annual decline over the last six months. Windstream, on the other hand, witnessed a 6% decline in both of the last two quarters.

A dramatic reversal?
One of the big surprises in Windstream's last quarterly report was an improvement in the company's core free cash flow. It's no secret that Windstream carries a large debt load relative to its peers. In fact, the company's debt-to-equity ratio of 10.3 is one of the highest in the industry.

To get an idea of how much more leveraged Windstream is, consider that AT&T's debt-to-equity ratio is just 0.8, while CenturyLink's ratio is just 1.2. This additional debt load has been hurting Windstream's cash flow, as interest costs have been cutting into net income.

In Windstream's last quarter, the company cut capital expenditures by 40% on a year-over-year basis. This significant improvement helped the company's core free cash flow reach almost $285 million, and the company's payout ratio was just 52%. This matched CenturyLink's 52% payout and is far better than AT&T's payout of over 90% in its current quarter.

However, if investors expect similar results in the future, they will likely be disappointed. According to Windstream's last earnings report, the company spent just $175 million on capital expenditures. However, the company's average capex spending in the last 12 months was 20% higher than last quarter. In addition, the company's projected capex for 2014 is expected to be between 14%-21% higher than last quarter.

Final thoughts
The bottom line is that Windstream's business revenue is slowing, and its consumer business is doing worse than its peers. When you combine these challenges with the likelihood of higher capital expenditures in the future, Windstream's 11% yield looks anything but safe.


Chad Henage owns shares of CenturyLink. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.