Windstream's Strategy Raises Debt but Should Spur Growth

Mar.25.11 | About: Windstream Holdings, (WIN)

Windstream Corporation (NASDAQ:WIN) transformed its strategy toward data and business-solutions through several acquisitions that have strained its balance sheet, as it is predominantly funding most of these with debt.

Windstream’s ongoing acquisitions to expand its coverage markets and subscriber count are vital for its survival in an industry that is undergoing consolidation. In fiscal 2010, the company had acquired NuVox Inc., Iowa Telecommunications Services Inc., Hosted Solutions Acquisition, and Q-Comm Corporation.

However, these acquisitions are expected to spur the company’s growth going forward. Windstream’s future strategic position is expected to improve as it will further shift its revenue mix to business and broadband, expand service offerings, increase wireless data backhaul services as well as offer managed services, cloud computing and co-location. Collectively, these acquisitions are expected to generate over $90 million in synergies in the future.

Windstream had approximately $7.3 billion in long-term debt at the end of 2010, up from $6.3 billion at the end of 2009. However, the company generated $818 million in adjusted free cash flow, resulting in a dividend payout ratio of 57%.

We believe Windstream’s healthy free cash flow, mostly generated through ongoing cost-cutting initiatives, will support its high dividend payout, whichis well above its Tier-1 peers AT&T Inc. (NYSE:T) and Verizon Communication (NYSE:VZ), at least in the near term.The companytargets a dividend payout target of 52–59% in 2011. Additionally, Windstream is making an effort to deleverage its business back to historical levels of 3.2–3.4 times.

Further, the company’s focus on expanding its broadband business via investments in fiber-to-the-cell projects and data center expansion are expected to fuel growth going forward. Conversely, Windstream remains challenged by sustained erosion in voice access lines due to stiff competition from cable and wireless operators.

Consequently, we are maintaining our long-term Neutral recommendation onWindstream, supported by the Zacks #3 (Hold) Rank.