What: Shares of regional telecom Windstream Holdings (OTC:WINMQ) fell 26% in May, according to data from S&P Capital IQ. At the same time, Windstream's recently separated corporate sibling Communications Sales & Leasing (NASDAQ:CSAL) endured a 14% haircut.
So what: The CS&L separation near the end of April left many investors confused about the true value of the two stocks. The two new stocks immediately added up to a 14% higher market value than plain old Windstream's, mostly thanks to the promise of debt reductions under the two-company structure. If early estimates of the revamped company structure came in on the high side, a quick downward adjustment makes perfect sense. In early May, Windstream reported first-quarter results with a modestly positive earnings surprise, but that didn't stop these stocks from falling even further.
Now what: CS&L's role in managing Windstream's network hardware and real estate assets isn't very clear yet, and we're still waiting for that company's first independent quarterly report. Even so, I'm thinking that Windstream and CS&L are misunderstood today, with potential for a serious rebound when the missing numbers start falling into place.
For example, popular financial information sites report a 6.8% dividend yield for CS&L and just 5.4% on Windstream shares. But Windstream plans to pay out common dividends of $0.60 per share this year, and CS&L's payouts will stop at $2.40 per share. At current prices, that works out to an effective dividend yield of 9.1% for CS&L investors and 19.8% for Windstream. But you have to read dividend announcements and then do the math to arrive at the right numbers, because both stocks have been offering prorated payouts around the spinoff event.
So there seems to be a misunderstanding at work here, driving Windstream's and CS&L's share prices too far down.