Update: Windstream REIT Spin-Off

Jul.29.14 | About: Windstream Holdings, (WIN)

Summary

Windstream announced plans to spin off fiber/copper network into a REIT.

Even confirmed original thesis that investors should focus on FCF and assets.

The ability to spin off assets into a REIT was not anticipated though it was suggested that the company should focus on a more flexible capital allocation strategy.

Prior to the opening today, Windstream (NASDAQ:WIN) announced the intent to spin off the telecommunications network assets into an independent, publicly traded REIT. The move allows the company to increase network investments while creating a yield focused entity that reduces income taxes. In the process, the new REIT will pay a $0.60 dividend and Windstream a $0.10 dividend for a total of $0.70. Worth noting, the company paid a $1 dividend prior to this plan.

Windstream forecasts that the combined adjusted free cash flow (FCF) would jump from $830 million to $946 million. Naturally anything that increases FCF unlocks value in the stock causing it to jump to a high of $13.30 today, but the stock has come back to only a gain of 12% at the point of writing. It now trades at roughly 7.5x the new FCF forecast with the stock trading near $12.

Back in March, my previous article wanted investors to stop focusing on the high 12% dividend yield. As always, the focus should be on the assets and FCF, instead of the amount of capital that the company distributes to shareholders. The stock has seen substantial gains in that time period sending the valuation from the 5.7x FCF level to the much higher level despite a large increase in forecasted FCF. At these levels, the stock is probably reaching the high valuation level.

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