By Ahmed Ishtiaq
Windstream Corp (WIN) is one of the few telecommunication stocks paying double digit dividend yields. At the moment, the stock pays 10% dividend yield and an annual dividend of $1. In the low yield environment, a lot of investors turn to dividend paying stocks. However, it is imperative to find stocks which can maintain its current dividend levels or potentially raise them. In order to assess the strength of Windstream's cash flows, I have performed a free cash flow analysis along with some crucial ratios.
For any company with such high dividends, it is necessary to measure whether the company will be able to cover its dividends through cash flows. For my analysis, I have used SEC filings, and the analysis covers previous three years. Along with cash flows, analysis also includes debt and some debt coverage ratios which can help determine the debt situation of the company.
Free Cash Flows:
Free Cash Flows
Depreciation and Amortization
Funds from Operations (FFO)
change in noncash current assets
change in noncash current liabilities
Operating Cash flows
Free Operating Cash Flow
Long Term Debt
Windstream net income has been declining during the past three years. At the end of 2009, net income was $334.50 million, which came down to $172.30 million by the end of 2011. However, depreciation and amortization expenses have increased steadily over the past three years. At the end of 2009, depreciation and amortization expenses stood at $537.80 million which went up to $847.50 million at the end of 2011. The funds from operations have shown an increasing trend over the period being analyzed, and currently stand at just above $1 billion. However, cash flows from operations have shown a mixed trend during the past three years.
At the end of 2011, operating cash flows stood at $1.2 billion. On the other hand, operating cash flows were $1.1 billion at the end of 2009 and declined to $1.09 billion during 2010. The company spends a significant amount on business, and over the last three years capital expenditures have increased considerably. Capital expenditures have shown a steady increasing trend over the past three years. As a result, free operating cash flows have been declining, and currently stand at $527.26 million. Over the past three years, WIN debt has been gradually increasing, and by the end of 2011 it stood at just below $9 billion.
Funds from Operations(FFO)/Total Debt
FFO/Capital spending requirements
Free Operating Cash Flow + interest expense/ Interest expense
Debt Service coverage
The funds from operations to total debt ratio has declined during the past three years and currently stand at 0.11. The FFO to debt ratio is extremely low for Windstream and can cause troubles in the near future.
The FFO to capital expenditure ratio indicates that the firm is generating enough funds to cover its capital expenditures. However, the ratio has declined considerably during the past three years and stands at 1.45 down from 2.93 at the end of 2009. In terms of interest coverage ratio, WIN is covered adequately, and the ratio currently stands at 1.94.
Cash flows from operations to interest ratio is close to 2, which means the firm should not have any trouble meeting its interest obligations in the near future. At the end of 2010, the company paid the highest amount in debt payments. As a result, the debt service coverage for 2010 came down drastically. However, further decrease in the ratio comes from increased interest expense.
Debt to Equity
Windstream peers include AT&T Inc (T), Sprint Nextel Corp (S) and Verizon Communications Inc (VZ). As the comparison table shows, all of these stocks trade at quite high multiples. Nevertheless, Windstream is trading at a discount compared to its peers. In addition, the margins are extremely slim in the industry, and most of the companies demonstrate negative EPS growth. The only concern for Windstream remains its high levels of debt. The company has the highest debt to equity ratio compared to its peers.
Windstream has made quite a lot of acquisitions recently. Acquisitions can bring new revenue streams as well as synergies. However, sometimes acquisitions also tend to drag the firms for a short period. At the moment, Windstream dividends look safe, but my only fear is the elevated debt levels of the company. There is a possibility that a decrease in cash flows can cause a dividend cut. Windstream paid $509.6 million in cash dividends during 2011, while the firm generated free cash flows of $527 million. At the moment, free cash flows provide a slim coverage to the dividends. Most of the firms executing acquisitions go through transition periods. A small cash flow decline can cause a decrease in dividends. Presently, Windstream is walking a tightrope, and the danger of a dividend cut exists for the company.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.