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Although CenturyLink (NYSE:CTL) was the primus inter pares of the rural telecom sector before its recent dividend reduction, we have also been covering its two largest competitors -- Frontier Communications Corporation (NASDAQ:FTR) and Windstream Corporation (NASDAQ:WIN). Windstream's shares generated a negative 22% total return in 2012, but bounced back by 4.2% because investors are relieved that Windstream isn't cutting its dividend. We began warming up to Windstream's 11.5% because its shares had been beaten so badly throughout 2012, and because we were expecting it to ease back on its capital investment program in 2013. We were pleased to see that Windstream's management confirmed our expectations on its CapEx, and that it would reduce its capital expenses to $800M-$850M versus the $1.1B spent in 2012. Because Windstream has maintained its dividend while CenturyLink recently cut its dividend, and because Frontier has cut its dividend twice since it acquired Verizon's remaining rural wireline operations, its dividend yield is well above its telecom peers.

Source: Bloomberg LP

Windstream recently reported Q4 2012 adjusted EPS of $.11/share, which was two pennies shy of meeting the analyst consensus, and was a decline from the $.19 adjusted EPS achieved in Q4 2011. WIN's pro forma revenue declined by 1.67% in Q4 2012 on a year-over-year basis, and this was a regression from the 0.83% achieved in Q3 2012, 1.18% in Q2 2012 and the 0.5% achieved in Q1 2012. This was worse than the 1.5% achieved at CenturyLink for Q4 2012. One piece of good news for Windstream stakeholders is that Windstream continues to generate the narrowest year-over-year decline in its access lines, moreso than CenturyLink and Frontier, as well as AT&T (NYSE:T) and Verizon (NYSE:VZ).

Source: Most recent earnings releases by the companies

Despite the heavy emphasis Windstream has made towards strategic communications services, the number of High-Speed Internet and integrated Services customers only increased by 55bp year-over-year, and decreased by 14bp in the linked quarter. CTL's 3.5% and FTR's 1.56% year-over-year growth rates exceeded Windstream's. WIN's year-over-year Internet growth was weaker than the 1.4% growth at Verizon, but at least it was better than the 23bp decline that AT&T saw. However, AT&T still has more Internet customers than Verizon, CenturyLink and Windstream combined.

Source: Most recent earnings releases by the companies

Another area that Windstream is leading its rural telecom peers in is the digital television segment. Until Frontier recently discontinued offering DirecTV as part of its bundles, all three companies had satellite television partnerships with DISH Network (NASDAQ:DISH) and DirecTV (NASDAQ:DTV). Windstream and CenturyLink also offer a proprietary digital television service. However, this is a case of good news and bad news. The good news is that Windstream has more than four times as many digital TV customers as CTL. The bad news is that Windstream's digital TV growth has stagnated, while CenturyLink's PRISM TV growth has been steadily picking up. CenturyLink's PRISM TV service has seen its customer count nearly double in the last 12 months, whereas Windstream's digital television subscriber count has stagnated.

Source: Windstream and CenturyLink's most recent earnings releases

Windstream Business' revenues grew by 3.3% in Q4 2012 on a pro forma basis versus the prior year's comparable quarter and reached $916.5M. The key driver for Windstream Business' revenues continues to be its data and integrated services, which has offset the continued decline in voice and long distance services. Data and integrated service revenues became the largest revenue source for Windstream Business in Q1 2011, and have reached $397.9M in Q4 2012 (9.5% year-over-year growth. Windstream's Consumer revenues declined by 1.56%, as a 4.87% growth in broadband revenues was not enough to offset a 4.97% decline in voice and long distance revenues.

Source: Windstream Financial Supplement

Windstream generated $534M in operating cash flows during the quarter and $238M in free cash flows. Windstream's free cash flows would be higher, except for planned capital investment expenditures this year. We previously discussed how Windstream expects its CapEx to decline after this year, which is expected to result in increased free cash flows in 2013. Over 36% of Windstream's CapEx in 2012 was due to its fiber-to-the-tower ramp-up, as well as integration of PAETEC. Windstream declared its 27th straight quarter of a $.25/share dividend, and this represents a 11.6% yield based on the December 20th intraday price of $8.60/share. Windstream has $910M in upcoming debt maturities, and has a $1.25B revolving credit line to pay it down ($1.235B remaining capacity). The company has generated $676M in FCFs in 2012, and it had a 76% payout ratio based on its dividend payments in relation to adjusted FCFs. We believe that the company will generate a similar level of adjusted FCFs in 2013 to enable it to sustain its $1/share annualized dividend, and to chip away at its $9B in debt.

In conclusion, Windstream is at a much better entry point now at $8.60/share than the $12/share price when we were contemplating it in December, and the $9.30 it was trading at in August. We can't believe that the company's shares were beat up beyond recognition in 2012, and even in 2011. One thing we believe management must do is sign a wireless resale agreement with Sprint (NYSE:S) in order to match what CenturyLink has with Verizon and Frontier has with AT&T. We are encouraged that Windstream is expecting its revenue and OIBDA for 2013 to stabilize, and the combination of these trends, as well as its completion of certain targeted capital investments will enable it to maintain its lofty $1/share (11.6% dividend yield) for 2013 and beyond.

Source: Bloomberg LP

Source: Windstream Offers 11.6% Dividend Yield And Is Nearing A Bottom

Additional disclosure: We may initiate a long position in WIN in addition to our long position in CTL. This article was written by an analyst at Saibus Research. Saibus Research has not received compensation directly or indirectly for expressing the recommendation in this article. We have no business relationship with any company whose stock is mentioned in this article. Under no circumstances must this report be considered an offer to buy, sell, subscribe for or trade securities or other instruments.