This $10 Telecom Is A Strong Value Buy

| About: Windstream Holdings, (WIN)
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Windstream Corporation (NASDAQ:WIN) is a great stock for investors seeking stability and high dividends. Windstream is poised to capitalize on the growth of high speed communication services and is a stock that will see solid gains over the next two years. While there is a chance it may not see dividend increases, it will nonetheless continue to pay one of the highest dividends among stocks.

I believe there is significant value in Windstream at its present price around $10 per share. While some analysts are worried about its debt and reliance on the shrinking landline market, Windstream's recent acquisitions, its focus on broadband, and its shift to providing more business services make it an attractive stock.

Windstream has long been viewed as a rural landline telecom provider, but its recent slate of acquisitions, most recently its acquisition of PAETEC late last year, shows it is focused on becoming a national telecom provider. Windstream is now a nationwide leader in broadband services after these acquisitions. Some investors look at these acquisitions as nothing more than having added $1.4 billion of debt to the company. The problem with this line of thinking is obvious, in order to grow beyond a rural telecommunications provider that relies heavily on landline communication Windstream has to acquire broadband and business services capability, and these acquisitions are proving to be fruitful in that respect.

When I compare Windstream to Frontier Communications (NYSE:FTR), another telecommunications provider with reliance on rural landline business, I see declining profits at Frontier that threaten its dividend. Frontier is not aggressive in expanding beyond its rural base and is hurting because of it. While Windstream is criticized for its high debt, it is becoming a major player as a national telecommunications provider.

Windstream's announcement last week that it is expanding its Carrier Switched Ethernet service means Windstream will now be a broadband provider in over 300 markets nationwide, allowing its customers increased high-speed communication services. It is not content to fight for dwindling market share in the rural telecommunication market. Its aggressiveness in becoming a major nationwide player in broadband services will pay off with rising profits beginning next year.

This aggressive expansion has led to poor earnings growth this year. Any company heavily reliant on rural landline communications will see growth pressure as it seeks to expand into broadband services. Its earnings have been hurt by large depreciation and amortization expenses. Windstream was also hurt by a recent FCC complaint involving Verizon Communications (NYSE:VZ) that clarified billing practices for certain wholesale products inherited from PAETEC that led to discounts and less earnings.

Going forward, however, expect to see earnings growth around 20%-25% per year for the next two years as Windstream's expansion takes effect. While Windstream has a high price to earnings ratio at roughly 34, it is still more competitive than its competitors. Verizon has a price to earnings ratio of almost 45, Frontier and AT&T (NYSE:T) are both over 48, while CenturyLink (NYSE:CTL) is over 46. As earnings grow over the next two years, Windstream will have an even more attractive price to earnings ratio than its competitors.

Consider as well that insiders have bought 23,000 shares of Windstream in the last four months. This is an indication that its stock price is low and that going forward earnings will take off. These insiders are aware that Windstream's strategy in becoming a national broadband leader will begin to payoff.

Windstream is still in the middle of a expansion from a rural telecommunications provider to a national player. Its fiber transport network has grown to roughly 115 thousand miles during that time. Wireless data usage depends on these fiber transport networks. Windstream knows that wireless data usage will grow into the future and that it can capitalize on this growth by expanding its fiber transport network.

Windstream has already invested $130 million this year alone in its fiber network. As earnings grow over the next two years, it will continue to expand this network and profit even more from the growth in broadband demand. Expansion of these networks is the key and Windstream has clearly shown that it will continue to invest heavily in such expansion in the coming years.

Windstream's high dividend has long made it attractive to investors. Some analysts have questioned whether it can continue to pay such high dividends going forward. Windstream's dividend yield of roughly 10% is still surpassed by its free cash flow. It is in a better position than it was last year to continue paying its large dividend. In 2011, its adjusted payout ratio was almost 99% of its free cash flow. This year, the ratio is roughly 78%. There is no danger of Windstream being forced to lower its dividend. While it is true that going forward it will not be raising its dividend, Windstream is currently the third highest dividend yielding stock in the S&P 500.

Windstream is in the process of reinventing itself from a rural local exchange carrier into a national broadband communications provider. While it still lags behind the big broadband providers like AT&T, Verizon and Sprint (NYSE:S), it is racing past Frontier and is challenging CenturyTel. Its recent announcement that it is expanding its Carrier Switched Ethernet service is further evidence that Windsteam is committed to being a major player in providing broadband service nationwide.

As these investments begin to yield profits expect to see earnings growth of 20%-25% per year over the next few years. This makes Windstream a real value play at its current price of slightly over $10. When you consider its dividend yield of 10% and the fact that Windstream has seen its adjusted payout ratio decline, resulting in no threat of reduced dividend payouts, then it is clear that Windstream would be a good addition to any portfolio.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.