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When it comes to high-yielding stocks, the telecom industry has some of the best stocks in the market. Windstream (NASDAQ:WIN) is the highest yielding telecom stock in the market at the moment, and it has had this title for quite a while now. Despite slow growth rates in the industry, the company has been able to continue paying attractive dividends. The company has also planned to carry forward this tradition and announced the quarterly dividend of 25 cents. The dividend yield is a major factor in attracting investors towards the stock. However, slow growth rates and high-dividend yield do not usually go well together - let's look at the situation of the company in order to gauge the stability of dividends. The market was impressed by the recent earnings announcement and the stock gained 10% as the earnings for the first quarter came out.

Dividends and Cash Flows Analyzed

A high dividend yield brings the threat of dividend cuts in the future if the growth in free cash flows is not enough to support the dividend obligation. Most of the companies paying high dividend yield face the questions about the stability of dividends. In my opinion, payout ratio based on free cash flows is the best measure of a company's ability to maintain its dividends in the long-run. Windstream has been making efforts to increase its free cash flows through different measures. The company has decreased capital expenditures compared to the last year and lower cash interest expense which produced strong free cash flow during the year.

Windstream has paid $592 million in cash dividends during the trailing twelve months. The company has not done treasury stock operations for five years. The company has issued a debt of around $4.133 billion TTM and repaid debt worth $4.318. The net change in debt is small as the amount of newly raised debt is almost the same as the debt paid. It looks like the exercise was done merely to renew the debt and increase the maturity of the debt.

Windstream has shown an uptrend in the free cash flows during the past twelve months - free cash flows have risen by 9% to $737 million, compared to $676 in the last year. The increase has come from the decreasing current portion of the debt, which dragged down the interest expense by 3%. The capital expenditures during the past twelve months have been close to $958 million. The company has retired its $780 million worth of the current portion of the long term debt. The payout ratio for the company is around 81% based on free cash flows. In future, I expect the payout ratio to come down as the company is growing its operating cash flows at an impressive rate and decreasing capital expenditures at the same time. In the last quarter, Windstream took its operating cash flows to $448 million, showing an increase of over 10% compared to the same quarter last year, comfortably beating the industry average cash flows growth rate of 4.7%.

Opportunities and Challenges

Opportunities mainly exist in the VoIP services - the company is expanding its offerings to businesses. At the moment, businesses are rapidly converting to VoIP services as a cheaper alternative for communication needs. VoIP is expected to be an important segment of the telecom sector in the future and Windstream is making solid inroads in this segment, which should ensure revenue and cash flow growth in the future. Furthermore, data bundles and cloud services are another lucrative segment that Windstream has targeted and it should also bring substantial growth for the company. However, access lines business of the company is facing serious competition from the wireless services providers. The majority of the telecom services providers are offering wireless services and the customers are moving to wireless causing a decline in the used access lines of the company. However, despite the competition in the access lines segment, the company has a gross margin of 53%, which is quite high for this sector. On the other hand, net margin of just above 2% for Windstream is considerably behind the industry average of 4.2%.

Conclusion:

As far as the dividends are concerned, I do not see any major threat in the short-term. The cash flows are growing and the company management puts focus on the dividends. As a result, I expect the current level of dividends to continue in the short-term at least. However, the stock may struggle for upside movement in price due to the doubts about the growth rates, threat to the access line business from wireless services providers, and poor net profit margin. However, the growth in the VoIP, data and cloud business segments should encourage the company, and it may result in solid growth in revenue in the long-term. The shareholders should hold the stock for now and enjoy the cash dividends.

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

Business relationship disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. IAEResearch is not a registered investment advisor or broker/dealer. This article was written by an analyst at IAEResearch and represents his/her personal opinion about the companies mentioned in the article. The article is for informational purposes only and it should not be taken as an investment advice. Investors are encouraged to conduct their own due diligence before making an investment decision. I am not receiving any compensation (other than from Seeking Alpha) for this article, and have no relationship with the companies mentioned in the article.

Source: Is Windstream's Dividend Sustainable?