A look at major rural exchange carrier Windstream Holding's (NASDAQ:WIN) performance this year would surprise you. Windstream shares have gained almost 15%, even though the company's business is not in the best of health. For example, when Windstream released its first-quarter results this month, its revenue declined year-over-year and earnings came in way below expectations.
Why the dividend is in trouble
There might be no respite for Windstream going forward as its earnings are expected to decline at a rate of 2% for the next five years. Also, the company has seen its earnings fall at a CAGR of 21% in the last five years. The only good thing about Windstream is its eye-catching dividend yield of 10.70%, but in my opinion, the company will not be able to sustain its dividend if its earnings continue declining.
The company has a payout ratio of 303%, while its cash position is weak at just $70 million. In addition, its debt is huge at $8.78 billion. If Windstream isn't able to increase its earnings substantially, the dividend might go down. Also, Windstream's dividend liability has been increasing as a result of an increase in the share count. Looking ahead, further increases in the share count cannot be ruled out because of the company's pension plan.
Hence, there are chances that Windstream's dividend is in trouble. Moreover, if we take a look at the strategies that the company is adopting in order to grow its business, the possibility of a dividend cut increases. The company is focused on improving revenue and is taking many proactive steps to accelerate sales and strengthen its competitive position. In addition, it's investing in both the business and consumer network to drive growth opportunities and improve the customer experience.
Growth strategies will need investments
So, Windstream will need more financial flexibility to follow its growth moves in order to get back on the growth track. The company's management augmented its marketing program in the business channel to strengthen sales and is witnessing positive trends that are supporting its efforts to move up-market, including 3% growth in enterprise customer locations and 8% growth in average revenue per business customer.
In addition, Windstream achieved meaningful financial and operating improvements in its consumer business, supported by network investments, including broadband expansion projects under the Stimulus Program, which resulted in new sales opportunities and reduced churn.
Windstream is focused on becoming the premiere enterprise communications and services provider, with the goal of growing revenue and generating stable sustainable free cash flow. In order to achieve this goal, the company is focused on three key priorities. First, it's taking steps to accelerate revenue growth. Its efforts are centered on marketing and sales, with a focus on higher lead generation and sales conversion rates.
Management is strategically positioning Windstream in the marketplace with aggressive branding and is investing in incremental advertising. The company is also making progress on its goal to unify its enterprise systems by moving billing, provisioning, and sales management systems on to a single platform to enable its team to effectively and efficiently manage all enterprise customer activities.
It has rolled out a new streamlined business customer portal, which provides significant enhancements for its business customers and improves its efficiency with more robust sales service capabilities. Windstream has also successfully integrated its PAETEC billing system with the completion of the Legacy McLeod conversion in February. It expects to complete the next stage, including converting the remainder of PAETEC, around the end of the year.
Windstream is looking to transform its business by investing in strategic network initiatives to drive revenue growth, and enhance the reliability and performance of its network. It will also make investments to provide enhanced services that its customers need, given the continuously changing and rapidly increasing data and content needs for both businesses and consumers.
Specifically, Windstream is continuing its transition to an IP network, expanding and enhancing the broadband network, and pursuing additional growth initiatives. As a result, its business customers are seeing improvements in its advanced high-bandwidth network solutions.
Its broadband services are now available to roughly 27,000 new homes as part of the Broadband Stimulus project. Windstream plans to substantially complete the Stimulus build-out this year, reaching a total of 75,000 homes, which should provide additional opportunities for unit and revenue growth.
Hence, to achieve these goals, Windstream will eventually need to make investments, and it is doing so. The company spent $153 million in capital expenditure in the first quarter.
The dividend is the most lucrative part about an investment in Windstream. But since Windstream is suffering from declines in revenue and earnings, it is making certain investments to grow the business. Hence, as it continues to invest in its business, it will need more cash, which it doesn't have. Also, the debt is quite high, which means interest payments are also high. As such, there's a good chance that Windstream might cut its dividend going forward.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.