The Good: Well established in its markets. The Bad: Competition is heating up. The Beautiful: The Dividend.
P/E
12
PSR
1.65
ROE
3%
Debt/Eq.
7.6
Div.Yield
8.2%
April 3, 2008 - Windstream Corp. (WIN-NYSE) is the largest domestic, rural wireline telecommunications company. The company, which operates as Windstream Communications, has a long history but was launched in mid-2006 through the combination of ALLTEL's wireline business with VALOR Communications Group. It offers business and residential local and long-distance phone services, as well as broadband data transmission and Internet access. It also offers satellite TV service through an agreement with EchoStar Communications' DISH network. Business services include telephony and communications equipment.
What makes an investor stop and look at WIN is the dividend. It's $1.00 a share. That puts the yield a little over 8%. So the next question is: can the company continue to pay the dividend?
Earnings are predicted to be $1.02 this year and $1.10 next year. That means the dividend takes up almost all of the earnings. Not a very comforting thought, especially when total revenues in 2007 were a little below those of 2008 ($3.25 billion vs. $3.26 billion) But there is a reason to be optimistic about the payment.
The company authorized a $400 million stock buyback through the end of 2009. It will be paid for by the company's strong cash flow. While it's under no legal obligation to buy the shares, WIN has the means to do so. With a dividend that high, it would be beneficial to have fewer shares outstanding. It's one way of ensuring the dividend won't be cut, something all companies are loath to do.
Revenues were down slightly because competition is heating up from Internet and wireless voice services. Cable operators are moving into rural areas as most urban dwellers already have their services. Windstream is fighting back with bundles, offering customers local and long distance wireline communications along with broadband and resale satellite-TV services (Echo Star). The company is customizing broadband packages to specific customer categories while it promotes faster high-capacity service. New products are being added, ones like video on demand and home networking. For its business acounts, the company is strengthening its ties by offering data-heavy bundles.
There is a cost to gathering these new revenues. Heavier investment in distribution and marketing will cut into gross margins in the short term but will have long term benefits. The company is trying to transition existing local exchange carrier assets from rate of return to price-cap regulation, subject to federal approval. If and when completed, it would add to profitability. Look for better operating efficiencies, lower interest expenses as debt is repaid, and share repurchases to help earninigs growth.
More numbers: Market cap is $5.7 billion on 454 million shares. Net profit margin is 14%. Earnings per share were 98 cents in 2007. Price to Earnings ratio is 12. Long term debt to equity is 7.6 to 1.
If you're income oriented, dig deeper into Windstream. While it is highly leveraged, that is the norm for telecommunications companies. Remember competition is intensifying and new costs will impair near term earnings. But the company is well positioned in its markets and offering new and more services to keep its share. The dividend looks very attractive and with the share buyback that is supposed to happen, it should be relatively safe. Still when it takes almost all of earnings to pay, you have to wonder if it can continue at the same level, especially with the increase in costs expected.
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