On Thursday, Windstream (NASDAQ:WIN) will release its quarterly report, and investors have seen the top-yielding dividend stock as a prime candidate to cut its quarterly payout for years now. Yet, in all the furor over whether Windstream can sustain its dividend, many investors never even ask whether Windstream has competitive advantages over peers Frontier Communications (NASDAQ:FTR) and CenturyLink (NYSE:CTL) that will lead to longer-term business success.

For good or ill, most investors look at Windstream, Frontier, CenturyLink, and other geographically diversified telecom companies from the viewpoint of the dividends they offer. But with many customers in rural areas not having the same access to competitive options for telecom services, Windstream has an opportunity to take traditional landline customers and offer them broadband Internet and other higher-margin services that could produce real growth. However, given the mixed success that Frontier Communications has had lately, can Windstream do better? Let's take an early look at what's been happening with Windstream during he 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

$1.47 billion

Change From Year-Ago Revenue


Earnings Beats in Past 4 Quarters


Source: Yahoo! Finance.

Are Windstream earnings stuck in the mud?
In recent months, analysts have been nervous about Windstream earnings, cutting their first-quarter estimates by $0.01 per share, and cutting $0.5 per share from their full-year 2014 projections. The stock has soared, though, rising nearly 25% since the end of January.

Windstream's fourth-quarter earnings showed the tug-of-war that the rural telecom faces in dealing with a declining segment in its landline business. Adjusted earnings per share came in $0.01 short of investors' expectations, although net income jumped substantially from year-ago levels. Revenue was flat, and the company projected a wide range for full-year 2014 revenue guidance, with potential losses of as much as 2.5%, or gains of as much as 1%. Windstream saw some gains in enterprise customer counts, but a drop in small-business customers weighed on its overall segment, and consumer counts for voice, broadband, and TV all fell between 4% and 6% from the year-ago quarter.

Source: Windstream.

Still, dividends are a big issue for Windstream, and many people get confused comparing Windstream's payout with its other financials. If you look merely at GAAP earnings, then you'll get the impression that Windstream's dividend is unsustainably large by comparison. But because telecom businesses have a large amount of asset depreciation to account for that doesn't affect actual cash flow, it's more appropriate to measure Windstream's dividend payout in comparison to free cash flow measures. By that standard, Windstream compares fairly well against CenturyLink, Frontier Communications, and other telecom peers. Windstream expects its payout ratio based on adjusted free cash flow to come in between 68% and 78% in 2014.

Windstream desperately needs to find ways to grow the number of subscribers who buy its Internet and television services, as that has been the key to growth at other companies. Frontier, for instance, saw a 6% jump in high-speed Internet customer counts in the fourth quarter of 2013, compared to a 4% drop at Windstream. In Frontier's first-quarter results announced yesterday, both broadband and video subscribers were up almost 7% from year-ago levels. If Windstream can't match those figures, it'll be hard for it to sustain any sort of growth trajectory, especially as Frontier and CenturyLink both push hard at getting residential and business customers to broaden their subscriptions.

Meanwhile, Windstream has made big strides toward shoring up its financial situation. So far, efforts to refinance its huge debt load have successfully helped Windstream dramatically reduce its interest expenses, even though the high dividend and some share buyback activity have diverted cash that could have been used for debt reduction. With the need to make capital expenditures to improve its network quality and offer new high-margin services, Windstream has to walk a fine line between spending enough and spending too much.

In the Windstream earnings report, watch to see how subscriber counts and revenue figures fare across its divisions. For Windstream to justify its recent gains, it needs to demonstrate that it can take better advantage of its opportunity to capture customers, and have them use more of the services Windstream provides.

Click here to add Windstream to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Dan Caplinger has no position in any stocks mentioned. 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.