Why Windstream's Impressive Performance Can Come To A Halt

Aug.26.14 | About: Windstream Holdings, (WIN)


Windstream's is witnessing a decline in important sectors.

The company is running out of cash and its financial outlook is poor.

The company's earnings are expected to decline in the coming years and it may not be able to sustain its dividend payout.

Windstream is a sell.

Windstream's (NASDAQ:WIN) performance has been sound in 2014, with the stock appreciating 40% thus far and outperforming the consensus estimates. When Windstream reported its latest second quarter results, it reported total revenue of $1.47 billion, roughly in line with analysts' estimates. It looks like investors have recognized the company's strategic moves, but will it be able to sustain its momentum?

Making some positive moves

Looking ahead, Windstream is intent on sustaining this performance. It is focusing on becoming the lead services provider. It is working on revenue growth and is looking to generate stable, sustainable free cash flow. In order to achieve this goal, it is taking up several measures. First, it is making efforts in marketing and sales so as to accelerate its revenue growth. The company also is working on bringing together its enterprise systems, which include billing, provisioning and sales management systems onto a single platform.

This will allow the company to work efficiently and deliver effective results. Next, Windstream is investing in strategic network initiatives so as to drive revenue growth and thereby improving its network performance.

Witnessing a decline

Windstream is focusing more on its business section, as 74% of its revenue comes from business sales, and the growth has declined sequentially. Business sales increased by 0.3% last quarter as compared to an increment of 1% in the preceding quarter. When compared to rival CenturyLink (NYSE:CTL), its business sales, which were flat half a year ago, increased 1% last quarter. Also, there were a few improvements in the consumer business, which were backed up by network investments. These included broadband expansion projects under the Stimulus Program, which brought new sales opportunities for the company.

Windstream is running out of cash and is in huge debt, while it still has a 10.70% dividend yield. The dividend spending is covered by the company's free cash flow, which might not help it last long as it already has a payout ratio of 303%, with only $70 million in cash. What adds to it is the debt of $8.78 billion. It's also estimated that the earnings dividend payout ratio in the next few years will remain above 200%. Therefore, the company needs to cut its current dividend because if it is maintained, then due to high gearing, shareholders' equity would turn negative two years from now.

Anyhow, the company's earnings have been declining the past five years, and are expected to decline at a rate of 2% for the next five years. The only attractive thing about the company is its dividend yield of 10.70%, which might not last for long unless it is able to increase its earnings, because declining earnings will also gradually bring down the dividend.

On the competitive front, Windstream is losing to CenturyLink in the high-speed Internet and video segment. While CenturyLink posted a 5.4% annual decline, Windstream saw a 6% decline in both of the last two quarters. The company, with a debt-equity ratio of 14.7, falls behind both CenturyLink and AT&T (NYSE:T) which have a leverage of just 1.2 and 0.9, respectively.

More risk

Toward the end of July, Windstream announced the approval of its spin-off of telecommunications network assets to a real estate investment trust, and this move has gathered negative sentiment. Many analysts expressed their concerns and think this is a bad move. Citi analysts said:

"Its proposed REIT conversion does improve cash flow to reinvest in its operations, but we are interested to learn more about the timing to suddenly shift its direction by cutting the dividend and raising its future capital intensity expectations. We are concerned that operating performance is unlikely to improve near-term and could degrade further given its recent financial decisions. We recognize greater tax efficiency and the value arbitrage from PropCo (pending the spin) could help to offset the potential risk to value within the OpCo. We remain neutral on WIN shares."

Moreover, the financial guidance for 2014 includes total revenue for the year within a range of a 2.5% decline to a 1% increase against last year's revenue, while the adjusted capital expenditures will fall between $800 million and $850 million, and adjusted free cash flow is in a range from $775 million to $885 million. Finally, the dividend payout ratio for the year will be between 68% and 78%.


Windstream is making some positive moves, and this cannot be ignored. But, at the same time, the company's business is declining. Moreover, the company pays out a pretty high dividend despite its woes, which is another point of concern. As such, investors would do well to stay away from Windstream, as the company's future looks uncertain.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.