Are Declining Operating Metrics A Threat To Windstream's 12% Dividend Yield?

| About: Windstream Holdings, (WIN)

Last week, Windstream Corporation (NASDAQ:WIN), a cloud computing and managed hosting company, announced its results for the quarter. Revenues were down by slightly less than 1% from the same quarter of the previous year. The drop in revenues also trickled down to the company's bottom line, which contracted by a significant 31%. WIN posted a quarterly EPS of 12 cents, less than that of Q3 2011's 15 cents per share and also below analysts' estimates of 13 cents per share.

The company is going through a tumultuous patch, giving negative earnings surprises in excess of 7% since the end of the last financial year.


Windstream operates through two segments: services and products, with the majority share of revenue coming from the former. In the quarter ended September 2012, the company's Services segment accounted for approximately 96% of its total revenue base. The Services segment also reported a decline in revenues, which was partially offset by the increase in business revenue, up 3% from the same quarter a year ago. High growth in IP, Data and Data Center Services led to a 9% growth in Data and Integrated Services' revenue from the same quarter a year ago. Business and Consumer Broadband revenue, by the end of the third quarter, represented approximately 70% of the company's total revenue, and it grew by 2.7% on a quarterly basis.

In the Consumer segment, the company showed some sequential improvement, adding 5,500 high speed internet subscribers in the quarter. However, net internet additions were down 37% from the same quarter a year ago. The company continues to suffer at the hands of wireless substitution, which has reflected negatively in the voice line numbers posted by the company over a number of quarters now. The company reported a total of 1.87 million Voice Lines in the quarter, which represents a 4.4% decline in Voice Lines compared to Q3 2011. The company's Digital TV revenue, unlike that of other carriers such as Verizon (NYSE:VZ) and AT&T (NYSE:T), also showed weakness, with the company losing customers both sequentially and on a quarter over quarter basis.

The table below shows the company's key business metrics and the deterioration in them in the third quarter.

Q3 2012

Q3 2011

Business customers




Small businesses




Voice lines






Digital TV



Other highlights of the company's earnings release include:

  • Adjusted OIBDA of $603 million, a drop of 1 percent over Q3 2011.
  • Free cash flows of $182 million, a decline of 13% over Q3 2011.
  • Operating income margin of 16.8%, a contraction of 330 basis points from the third quarter of the previous year.


WIN pays a dividend of 25 cents per share, which roughly translates into a dividend yield of 12%. Though attractive, what the dividend lacks is growth, which is visible in the company's dividend history. In the quarter ended September, the company paid $147 million in dividends while generating $182 million in free cash flows, which indicates the company's ability to sustain high payout through its cash flows. However, the worrying sign is the deterioration in its operations and what that bodes for its future dividends. Another worrying sign is the recent downward trend in free cash flows. Even though the company has not cut its dividend and recently declared a quarterly dividend of 25 cents per share, factors such as upcoming debt maturity of almost $1.10 billion in 2013 as well as the decline in free cash flows may warrant a dividend cut in the days to come.

WIN is trading at 15 times its forward earnings, at a 7% premium to the forward multiple of CenturyLink (NYSE:CTL). However, the stock is trading close to its 52-week low of $7.8, which could prove to be a good entry point for investors (with high risk appetite) seeking capital appreciation as well as dividend income.

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

Business relationship disclosure: The article has been written by Qineqt's Telecom Analyst. Qineqt is not receiving compensation for it (other than from Seeking Alpha). Qineqt has no business relationship with any company whose stock is mentioned in this article.