Windstream Corporation: Stable Income for Conservative Investors

Windstream (NYSE: WIN) debuted in July 2006 when wireless service provider Alltel (NYSE: AT) spun off its traditional phone-line business and combined those assets with privately owned Valor Communications.

A member of the prestigious S&P 500 Index, Windstream is currently the largest telecommunications company in the United States focused on rural customers. The firm operates in 16 states, focusing mainly on deep southern states such as Alabama and Georgia, but also operates as far west as New Mexico and as far north as New York.

The company provides a variety of telecom services, including local, long-distance, and broadband high-speed Internet. Revenues in 2007 are expected to be north of $3 billion.

For the past four quarters, WIN has paid a steady dividend of $0.25 per share, providing shareholders with a yield of 7.7%. With total annual payouts of approximately $477 million and free cash flow of nearly $718 million, the company pays out about 67% of free cash flow. As such, we consider the dividend highly sustainable over the long-term.

WIN focuses on rural markets where competition for telephone customers from cable companies and other telecoms is far less intense than in the big cities. Rural phone companies are traditionally cash cows with strong operating margins -- and WIN is no exception.

The company is projected to earn $0.92 a share in 2007 -- a total forecast to grow slightly to $0.96 in 2008. With highly predictable earnings and dividend payouts, WIN's share price typically fluctuates in a narrow range. Over the past 12 months, the stock has hovered between $12.38 and $15.63.

Potential risks include competition from cable and wireless providers. When urban areas are saturated, cable companies are likely to push harder into rural areas to gain telephone customers. At the same time, wireless service has and will continue to reduce the demand for fixed or land lines. Already, the company is losing nearly 5% of these phone customers yearly, although so far those losses have been replaced with increased Internet revenues.

Furthermore, the company has a relatively solid balance sheet, which should enable it to continue gaining market share through acquisitions. And Windstream has done just that, as shown by the recent purchase of CT Communications -- an all-cash deal valued at $585 million that will hand the company another 30,000 broadband Internet subscribers. Future acquisitions should help offset declines in the traditional phone line business, enabling WIN to maintain its generous dividend payments.

WIN is an appropriate stock for those investors who seek a stable income stream, but are not necessarily hunting for capital gains. If you are one of them, then WIN should be a winner.

Disclosure: none