Uncertainty Threatens Windstream Dividends

by Luke Jones  on Monday, Nov. 18, 2013 12:00 am  

Jeff Gardner, CEO of Windstream, says the company has transitioned to new revenue streams, but not all analysts agree. (Photo by Russell Powell)

Why?

Mary Michaels, vice president of investor relations at Windstream, said it has to do with how tax is calculated for Windstream’s earnings.

The dividend yield comes from Windstream’s free cash flow. At the moment, more than half of that cash flow goes toward paying a dividend.

“What determines the taxability in the dividend is a calculation based on Windstream’s earnings,” she said. “What that calculation does is determines an amount that, if we distribute over that amount, it’s considered a return of capital.”

It started surpassing that amount earlier this year, Michaels said. She said that when Windstream spun off from Alltel in 2006, the company had some retained earnings.

“We had an accumulated balance from when we formed; each and every year we were using a little of that accumulation and also generated a portion of it from our current earnings,” she said. “We reached a point where the accumulated portion had been used, and so now we’re at a point where, with such a large dividend out of free cash flow, part of it will be taxable and part of it will be considered a return of capital.”

The “return of capital” portion is essentially money invested in the stock that’s returned to the buyer. So from one angle, it could be construed that it’s not actually a dividend. But Michaels said that the change is purely clerical.

“From Windstream’s perspective, it’s still a dividend,” she said. “It’s cash. Cash is cash. But the change is only from the taxability standpoint of the individual receiving it.”

 

 

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