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Executive summary:

  • $1/share dividend in FY 2014, stock yields 12.50% based on its current price.
  • Balance sheet leverage increased significantly, both equity and long-term debt decreased.
  • Adjusted free cash flow payout ratio higher than expected, payout ratio between 68-78% in 2014.
  • Failing growth oriented strategy, revenue most likely to decline in 2014.
  • The company should cut its dividend and start to repay its debt more aggressively.

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Windstream Holdings (NASDAQ:WIN) published their fourth quarter earnings last week. I followed this earnings release with great interest, since I strongly doubt Windstream's dividend payments are sustainable in the long-run. Windstream's performance last year and the guidance for this year support my initial thoughts regarding the company's unsustainable dividend yield. Despite a few positive notes about their performance, I found mostly negative indicators for the growth oriented strategy and the company's future dividends. In this article, I will discuss both the positive and the negative notes from Windstream's fourth quarter earnings release and restate my bearish outlook for the stock.

Dividend payments

One of the few positive notes was the company's dividend. It seems very likely that the company maintains its quarterly dividend of $0.25/share for the next year. Considering that the shares trade around $8/share, the company yields a very attractive 12.50%. The $0.25/share quarterly dividend has become an important pillar that supports the stock at its current level. If this pillar disappears, the stock could plunge immediately. Therefore, it is a positive sign that the company is likely to pay the dividend for at least a year. However, the question remains whether Windstream will be able to pay its dividend in the next couple of years as well.

Balance sheet

Further, Windstream proudly announced that it had improved their balance sheet. According to the press release, the company was able to decrease their debt by more than $200 million. That sounds like a positive note. In fact, the company did not improve their balance sheet at all. On the contrary, Windstream's balance sheet is even worse than it was a year ago. For example, take a look at the company's long-term-debt-to-equity ratio (hereafter: LTDTO ratio). The LTDTO ratio was 9.69 in 2012 and increased to 13.28 in 2013, a 37% increase year-over-year. Despite the fact that the company reduced its debt by $200 million, the balance sheet is a lot more leveraged than it ever was a year ago.

Adjusted free cash flow

Windstream managed to earn enough (adjusted) free cash flow to support the dividend payments in 2013. The adjusted free cash flow was $891 million and the dividend payments amounted $594 million. This equals a total payout ratio of 67%. However, Windstream expects that the adjusted free cash flow will decrease compared to last year. The adjusted free cash flow is likely to be between $775 million and $885 million. This equals an expected payout ratio between 68% and 78%. For Windstream, it is very important to control the payout ratio. If the payout ratio increases even further, the dividend is immediately in jeopardy. This is a result of the company's extremely leveraged balance sheet.

Growth strategy

"We are executing a growth-oriented strategy while also managing our legacy business for profitability." This quote was published along Windstream's fourth quarter earnings. It sounds quite nice to be honest. However, what is the meaning of this particular quote? I guess every self-respecting company executes a growth-oriented strategy. I find evidence in Windstream's fourth quarter earnings report that the actual facts are not in line with the company's statement. For example, last year's revenue decreased by 2% compared to 2012 and Windstream expects that its total y-o-y revenue will decrease again in 2014. I already mentioned that the company's adjusted free cash flow will decrease as well. This does not sound a true growth story to me.

Going forward

Overall, I see more negative notes than positive notes in Windstream's fourth quarter earnings report. This is in line with my previous articles about Windstream Holdings. I find it very unlikely that the company will maintain its current dividend and execute their growth-oriented strategy at the same time. Besides, the company's current 10%+ dividend yield proofs that an investment in the shares is quite risky, even at its current level of $8/share. Therefore, I suggest that Windstream cuts their dividend payments and starts to improve their balance sheet. Eventually, this will improve the company's financial position and its growth-oriented strategy. I expect that the current shareholders strongly disagree with my idea. However, it is in the company's (and also the shareholders') best interest.

Source: Windstream Holdings' Q4 Earnings: More Negatives Than Positives