“A stock with a notoriously big juicy yield can be a beautiful thing. But it can also be a huge red flag. I’m not talking with a stock with a 4%, 5%, 6% yield, I mean mega yielders line Windstream, WIN, with the yield over 10%… At the same time you have to be careful with these stocks with massive dividends because that mega high yield might be just a sign that the stock has been crushed and it will have to cut its dividend or maybe get rid of it entirely.
Windstream is a rural telco carrier that made a couple of decent size acquisitions lately. When I saw in today’s “Wall Street Journal,” that an outfit called Fairpoint which shouldn’t be in the same sentence as Windstream, this is another regional telco company. It’s the same kind of company. This was once a super high yielder, they say it might have to file for bankruptcy in part because of its $2.3 billion acquisition of Verizon’s land lines in New England, I get concerned.
Windstream is the better company by far. Today it made a number of announcements that indicate it’s got some, I don’t want to say liquidity issues. It’s Wall Street speak for cash. I’ve got to get more concerned. Windstream is looking to raise $400 million in debt to pay for the cash portion of two acquisitions and trying to renegotiate terms with some of its creditors. When you see that thing from a company with a 10% yield, I’ve got to get worried, a little worried about the dividend because you’ve got to be intelligent in this business and skeptical…
In Windstream’s case, I think there are a lot of reasons to believe the dividend is secure. When I had the company CEO on the show last December, he made promises about the safety of Windstream all have been kept. We put the CEO’s feet to the fire. Unlike Fairpoint or Verizon’s New England land line, Windstream’s two acquisitions in May and Lexcom earlier this month are expected to be additive to earnings their first year. Third, this company throws off a lot of cash. It’s expected cash flow for 2009 is $2.16 per share. More than twice the dollar per share dividend payout. Remember, sometimes you have to look at the cash flow because half of Windstream’s access lines have broadband services, they provide higher, more stable cash flows. Now when we evaluate the safety of a dividend we need to look at debt. Windstream doesn’t have any coming due until 2013 the company has plenty of time to raise money, or refinance and there is nothing that puts the dividend in immediate danger. Windstream is a good phone company. It has a churn rate of 5.5%, well below the 10% average for its peers. I think Windstream’s mighty dividend is safe.” — CNBC’s Mad Money 9/29/2009
On Tuesday, Jim Cramer revisited a discussion with Jeffrey Gardner, president and CEO of Windstream (WIN) that was started last December. It was then that concerns over the safety of the company's dividend began to bubble over, and those same concerns are resurfacing now.
As Cramer pointed out, there is a lot of speculation as to whether Windstream's double-digit yield is sustainable in light of recent developments in its business. Among these developments are three acquisitions within the last year, which will obviously cost the company money in the near term. Furthermore, the company announced yesterday that they raised $400 million in debt through a private placement transaction. The newly raised capital will be used to help pay for the acquisitions and also to restructure some existing debt baggage from the acquisition of D&E Communications (DECC). Luckily, Gardner expects the acquisitions to start paying-off within a year. But with other pressing needs for cash right now, it is logical to wonder if the company can continue to pay out its hefty dividend.
In short, Cramer was convinced by the commitment Gardner and the Windstream management team showed toward keeping the dividend payout. No doubt Gardner choose to come on the show – on the same day the company announced the capital raise – in order to state his case that all is fine. And we would have to agree with him that the dividend is looking safer than it has for the last few months. Windstream has managed to maintain it huge dividend, through a very tough market environment, and no one would have thought twice about them cutting the dividend as so many others have done. With the private placement offering, we believe that barring another huge downturn, WIN will have the cash on hand to keep that dividend safe.
We are reaffirming our Undervalued stance on WIN as of this week’s report. Even stripping out the attractive dividend from our analysis, the stock is trading well below its historically normal ranges of price-to-cash earnings and price-to-sales. Our rationally expected price range based on the company's current fundamentals is $10.70 to $13.90, which means that long term investors can like the value available and should be able to sit back and collect dividends in the meantime.