Will This Telecom Keep Its Big Dividend In 2013?

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Most investors consider Windstream (NASDAQ: WIN) to be an income investment. Given the low interest rate environment and the continuation of the 15% dividend tax for those earning less than $400,000 per year, this stock should not be viewed as a growth stock. It is likely that Windstream will not double in 2013. It probably will not even increase 25%. The key question for investors looking at Windstream moving forward is whether the stock will continue paying its dividend.

Cash Flow

Not surprisingly, Windstream continues to see its traditional business as rural telecom service provider decline.  But the company has done a good job of growing its business services and broadband business to make up for most of this decline. The hefty dividend payment shareholders are expecting will continue to be met in 2013.  The company is paying a dividend ratio of just 66% of its cash flow. The acquisitions the company has made in the last couple of years continue to pay off by providing the revenue necessary to continue to pay dividends. 

As of the third quarter of 2012, Windstream has seen its business service revenues increase 3% as well as seeing its broadband increase 4%, with strategic revenues now accounting for over two-thirds of total revenues – these figures are a direct result of acquisitions such as PAETEC and Hosted Solutions which have allowed the company to distance itself from its rural telecom roots.  At the same time, total revenue will increase in fiscal year already increasing from just under $4.3 billion in 2011 to over $4.6 billion in 2012 without accounting for the last quarter.  This is good news for dividend investors and is in line with the trend seen in other rural and regional telecom providers as they switch from their legacy business towards providing business services and broadband access.  

CenturyLink (NYSE: CTL) has seen a decline in revenues while, like Windstream, still increasing its broadband and business services.  CenturyLink has seen its total revenue decline from over $15.3 billion in 2011 to under $13.8 billion in 201in the second and third quarters of 2012.  Frontier Communications (NASDAQ: FTR) has also seen declining revenues year over year in each of the first three quarters of 2012 and has actually cut its dividend by almost 9 cents a share in an effort to increase net income. Neither company is in as good a shape as Windstream in ability to continue to see the cash flow necessary to provide a strong dividend.

Debt Refinancing

One reason investors have been leery of Windstream has been its large debt holdings.   The company has taken on debt as it took over smaller rural telecom companies in addition to infrastructure buys in changing its business model to a provider of strategic services to businesses.  But the company has recently announced a series of debt restructuring plans that will allay any fears investors had that debt might get in the way of Windstream’s generous dividend payments. 

Windstream will refinance its debt that is due this year by refinancing loans due in July and using a revolving credit loan to pay down debt due later in the year.  In addition it will offer a private placement of $700 million in unsecured notes in order to pay down debt inherited in its buyout of PAETEC. The debt that is being issued will carry a significantly lower interest rate than the debt that will be paid off. The savings will be significant, and will enable the company to continue with its current dividend payout ratio, perhaps even allowing the company to increase the payout going forward. In the coming months alone, the restructuring will result in savings of $70 million.

Dividend Is Safe

With the prospect of solid cash flow in the future coupled with the savings the company will receive with its debt restructuring investors will continue to see generous dividends from Windstream.  Currently the company has a 62% payout ratio. This fares favorably with other competitors. Verizon (NYSE: VZ) has a ratio of over 89%. AT&T (NYSE: T) has a higher ratio than Windstream at 75%, while CenturyLink’s ratio was over 86%.  AT&T has seen a decline in earnings per share since 2010 which goes a long way towards explaining its payout ratio, while Verizon has seen an almost 3 cent per share increase in its dividend since 2011. Even without the debt restructuring Windstream’s ability to continue its dividend is sound.  The concern with the company’s ability to pay dividends in the future is overblown.

Conclusion

If you are looking for a growth stock then Windstream is probably not a good option right now. However, if you are searching for a generous dividend from a stock that will continue to pay handsome yields into the future then Windstream is a perfect fit.


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