Why I Was Wrong To Predict A Windstream Dividend Cut

| About: Windstream Holdings, (WIN)

To understand why I predicted a Windstream dividend cut it's necessary to go over some of the major dividend cuts of the last few years - a history of broken promises.

One of the most blatant examples is the total elimination of the dividend at Yellow Media, where it had expressly stated it would not do so. But why, then, this betrayal? It became inevitable when its low stock price, brought about by short sellers, put the company in violation of its loan covenants. Some would also claim cash flow.

Alaska Communications (NASDAQ:ALSK) came next, despite assurances to the contrary. The cut was preceded by a change in management by the board of directors - a clue for evaluating future situations. Alaska now pays no dividend at all.

Otelco (OTT) would follow, the victim of higher expenses due to increased competition.

Frontier Communications (NYSE:FTR), after promising there would be no cut, did cut its dividend anyway. The problem wasn't the CEO, it was the Board of Directors that mandated it. At least in this case, the cut was small enough that an investor could decide to stay with the company, or collect that dividend and get another for the quarter by reinvesting somewhere else. One very obvious characterization of this cut was the huge short selling involved in the stock. That's when you borrow the stock on paper and sell it hoping to buy it back at a lower price. Your profit, or loss, is the difference in price. Usually, if there are a lot of people short, it tends to lower the stock price just from the pressure of those shorting it. And the shorting of Frontier was massive.

More recently, CenturyLink (NYSE:CTL) cut its dividend, with the Board saying they preferred to buy back its stock on the open market. No consideration for shareholders who depended on the dividend.

Which brings us to Windstream (NASDAQ:WIN), a stock I had held since 2008. It had also promised several times that it wouldn't cut the dividend. It has massive short selling too. Tuesday's volume was 13,961,781; then it was 12,821,753. It recently held a board meeting where the board shifted the positions around. Several credit rating firms cut Windstream's ratings, mentioning its dividend.

So I sold my shares. Then it declared its regular dividend on 05/08/2013, Ex-Date 06/26, Record Date 06/28, Payable 07/15. That's over two months between the announcement of the dividend and the payment. You just don't leave that much time unless you want to reassure people. So I've concluded I was wrong. If it was going to cut its dividend, it would have done so by now. Windstream isn't the rural telecom it used to be. Its total business and consumer broadband revenues made up 71% of its first quarter revenues. It will have 7 data centers in North Carolina when it finishes construction on the latest one. These data centers provide managed enterprise hosting services (cloud computing), which together with the cash flow from consumers help support the dividend.

Additionally, it was recently awarded a 10 year multi-million dollar GSA contract. Together with a substantial reduction in CAPEX spending in the second half of the year, this should provide the cash flow numbers necessary to convince the shorts to prowl elsewhere. Last week, in a very down market, its share price held above its low for the year. This is certainly not a growth stock. But yielding 12.63%, it's right for me; and when the shorts bolt there should also be considerable upside. S&P still gives it five stars.

I got back in last week.

But I would like to see short selling ruled out. It hurts individuals, companies, and the economy in times of market stress. It serves no investment purpose. It simply encourages gambling on stock prices and enriching brokers. When it is temporarily suspended it is after the damage has been done to the markets.

Disclaimer: The opinions in this article are for informational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned. Please do your own due diligence before making any investment decision.

Disclosure: I am long WIN. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.