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Vinay Singh
Vinay Singh
Articles (229) 

Windstream Might Not Be a Good Buy

April 18, 2014 | About:

Windstream (NASDAQ:WIN), one of the major rural exchange carriers in the U.S., is in a soup. Its earnings are expected to decline at a CAGR of about 20% over the next five years. This level of decline in net income is certainly not encouraging for Windstream as it could hurt the dividend. However, Windstream has cut its capital expenditures. Still, if the company cannot pull up its earnings, its dividend might suffer. Moreover, the company has been increasing its share count, which will lead to an increase in the dividend that it pays out.

Windstream is expected to report fourth-quarter earnings on Feb. 27. Before that, it will be wise to take a look at what analysts are expecting from the company in the quarter. After that, we will take a look at some of the moves that Windstream is making in order to get better in the future.

What's Expected?

Windstream's revenue is expected to fall 2.40% from last year to $1.50 billion in the quarter. Earnings per share are expected to drop to $0.09 per share from $0.11 per share last year. For the current year, earnings are expected to decline to $0.34 per share as compared to earnings of $0.46 last year.

It is evident that Windstream's financials will take a solid hit in the fourth quarter, and the long run also looks depressing. The past is also not on Windstream's side as its earnings have dropped at a CAGR of almost 18% in the last five years. Moreover, the share price is also down 24% in the last year, and there is a possibility that its dividend might be decreased. In short, it is a doom and gloom scenario for Windstream.

Some Positives

However, there are certain positive points about Windstream that shouldn't go unnoticed. Analysts expect Windstream to grow through investments in fiber-to-the network, broadband network, proper expense management and a capital-efficient business model in the future. Analysts' optimism regarding Windstream's growth is helped by the company's new service offerings to businesses such as VoIP services, data bundles, cloud and managed services, data center co-location, fiber transport, as well as increasing distribution channels.

Windstream has already been adding data centers to support cloud-based services, providing utmost customer satisfaction, and it is also investing in different business channels. The company continues investing aggressively in fiber-to-the-tower deployment and broadband network capability. Windstream is also aiming for business expansion by enhancing its broadband coverage and surfing speed along with ramping up its FTTT construction. Windstream plans to boost its revenue growth by adding 75,000 new broadband addressable lines.

Windstream's business expansion also includes investing in business services, data services, internet services and consumer broadband as an add-on to its land-line telephone services.

To revamp its cash flow, Windstream has planned to lay-off 400 employees, equal to 3% of its workforce. The move is aimed at improving its operational efficiency and help Windstream save about $20 million per year.

Dividend Under Threat

Windstream yields an impressive 12.70%. But at the rate at which the company's earnings are expected to decline, it might not be able to sustain the dividend. Windstream already has a payout ratio of 526%, and as mentioned earlier, earnings are expected to decline at a massive 20% per annum for the next five years. Also, the company has just $73.40 million in cash on the balance sheet, while its debt stands at a huge $8.93 billion, which is double that of its market capitalization.

To keep its dividend intact, Windstream should refrain from offering any more shares. It should also work toward decreasing the payout ratio by reducing capital expenditure or by keeping it under control. Moreover, for growth purposes, it won't be surprising if Windstream cuts the dividend. As we saw, the company has several growth-oriented moves in store and these might require substantial investments in the future.


Windstream's dividend is, no doubt, eye catching. But the company is in dire straits and the projections going forward are not in its favor. Even if the company issues a good earnings report with a good outlook, it won't make it a good long-term buy. Thus, investors should stay away from this company and abstain from buying it just for the sake of a hefty dividend, as there isn't much surety that it would sustain in the long run.

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GuruFocus has detected 5 Warning Signs with Windstream Holdings Inc $WIN.
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