Should Windstream Cut Its Dividends?

| About: Windstream Holdings, (WIN)

By: Ahmed Ishtiaq

Windstream Corp (NASDAQ:WIN) is a leading provider of communications and technology solutions, including cloud computing and managed services to businesses countrywide. In addition to business services, the company provides broadband, video and voice services to customers in mainly rural markets. Windstream operates in 48 states and the District of Columbia, a long-haul and local fiber network across roughly 115,000 miles. Additionally, WIN has a strong business sales segment and 21 data centers providing cloud computing and managed services.

In my previous articles, I have thoroughly analyzed the financial position of the company. We believe that the company should try to reduce its mammoth levels of debt to increase the financial flexibility. Recently, the company announced its third quarter earnings, which do not fill its investors with joy.

Third Quarter Results:

The company reported third quarter earnings per share of 12 cents, missing the Estimates by a penny. Earnings for the quarter came down 20% from the year ago earnings of 15 cents. The earnings figures excluded impacts of $7.5 million in restructuring costs and $7.8 million in after-tax merger and integration expense. Adjusting for these costs, WIN GAAP earnings per share were 9 cents, down 40% year over year. Further, Pro Forma revenue fell 1.2% year-over-year to $1,552.4 million in the third quarter.

Adjusted OIBDA came down to $603.1 million from $610.3 million in the year ago quarter. Moreover, adjusted free cash flow was $182 million during the third quarter. In 2012, Windstream have generated $669 million in adjusted free cash flow and paid out $441 million in dividends. At the moment, dividend payout ratio based on adjusted free cash flows stands at 66%. However, without the adjustments, dividend payout ratio goes up substantially. Furthermore, the company is working on reducing its costs. Windstream completed a restructuring of its management during the quarter, which will provide annual savings of about $40 million.

Windstream line losses including voice lines, digital television customers and high speed internet were 2% year over year. The company lost 71,900 access lines year over year. Voice lines decreased by 4% year-over-year to 1.87 million. Cash position at the end of the quarter was better than the last year. The company had cash and cash equivalents of $114.8 million, compared to $34.3 million in the same quarter last year. Furthermore, debt and lease obligations also showed a positive sign. Long-term debt and capital lease obligations came down from $8,936.7 million at the start of the year to $7,848.3 million.

Dividend Profile:

Windstream is one of the best dividends paying stock in its sector. In fact, dividends are a massive pull for its investors. However, due to the high levels of debt and slow growth in revenues; the company faces the prospect of cutting its dividends. At the moment, Windstream pays an annual dividend of $1.0 per share, yielding 12.09%. Management understands the importance of this dividend yield and wants to maintain the dividends. However, slow growth in earnings and weak cash flows can bring the company in hot water. Windstream has taken positive steps by decreasing the leverage and improving the balance sheet. As a result of these refinancing efforts, cash flows will improve, but further efforts are needed. I would like to see Windstream decrease its debt and bring it in line with the industry. Nonetheless, I believe Windstream dividends are safe in the short term.

Peer Comparison:























EPS Growth





Operating Margin





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Debt to Equity






Windstream peers include AT&T Inc (NYSE:T), Frontier Communications (NYSE:FTR) and Verizon Communications Inc (NYSE:VZ). As the comparison table shows, the stocks trade at quite high multiples in the industry and Windstream is trading at a discount compared to its peers. Only Frontier Communications has lower multiples than Windstream. In addition, the margins are extremely slim in the industry, and all of the companies demonstrate negative EPS growth. The only concern for Windstream remains its high levels of debt. The company has the highest debt to equity ratio compared to its peers.


Windstream can gain from rapidly growing high speed internet market. Furthermore, the acquisition of PAETEC will help the growth as the company starts to integrate the business. However, I maintain my stance that the company needs to further reduce its debt and achieve financial flexibility. At the moment, margins are extremely slim in the sector, and one bad quarter can weigh heavily on the company. I believe Windstream should follow its peer, Frontier Communications and cut its dividends. Windstream dividend yield is incredibly high, and it will not be affected heavily by a small dividend cut. Windstream needs to take some concrete steps to decrease the debt and ensure the long term future of the company.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: EfsInvestment is a team of analysts. This article was written by Ahmed Ishtiaq, one of our equity researchers. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.