Windstream Lures Investors With Dividends

Alltel Corp.'s spin-off of its wireline division last summer represented a split of the company's future from its past, separating its high-growth wireless division from its shrinking wireline division.

Through that transaction, Alltel shed almost $5 billion in debt and, analysts speculated, set itself up as a buyout target, a prediction that came true last week when Alltel announced it would sell to private equity firms Texas Pacific Capital and Goldman Sachs Capital Partners for $27.5 billion.

Far from dead weight, though, Alltel's former wireline division, which remains publicly traded as Windstream Corp., is still a solid income generator and a steady source of cash for investors.

For each quarter since the company launched, Windstream's board has set dividends at 25 cents a share, resulting in an annual yield of roughly 7 percent. For the last quarter, Windstream landed at the top of the dividend yield ranking of Standard & Poor's 500 companies with a 6.84 percent return. That means investors got more cash flow from each dollar invested in Windstream stock than any other S&P 500 company in the last quarter. Windstream was just ahead of Citizens Communications Co., a competing rural local exchange carrier that has also found a niche as a high-dividend stock.

Jeff Gardner, former Alltel CFO turned Windstream CEO, said that, at $1 dividend per year, his company will pay investors $477 million a year.

Why spend so much profit paying back investors? Gardner said it's a way to highlight the cash-generation capabilities of Windstream's assets and attract those investors looking for high-dividend stocks.

Before the spin-off, revenue from Alltel's wireline division was declining by roughly 1 percent a year but still coming in well over $2 billion a year. In its first annual report under the new company name, Windstream reported over $3 billion in revenue. Much of the past year's revenue growth, however, could be attributed to an expanded sales capacity through a larger network and added satellite TV service.

Like all recent years for wireline providers, Windstream lost customers last year. The company's access line loss rate was 4.4 percent on a pro forma basis for fiscal 2006.

By contrast, Alltel's wireless division grew by leaps and bounds leading up to the spin-off, particularly through acquisitions of other carriers like Western Wireless in 2005 and Midwest Wireless in 2006. Alltel's most recent dividend yield ratio, however, was 0.8 percent.

But by splitting the wireless and wireline businesses into two separate public companies, Alltel and Windstream can cater to two different types of investors.

Alltel is "focused on a growth business with bigger capital needs going forward. Our business is more of a steady producer of cash [with] lower growth," Gardner said. "Those who wanted growth could continue to hold the wireless stock. Those who wanted income could focus more on our stock."

And those who held onto both stocks could have the best of both worlds. Through the spin-off transaction that closed in July, Alltel shareholders got 1.04 shares of Windstream for every share of Alltel stock they owned.

Assuming they held onto those shares, those investors could have enjoyed the steady 7 percent return from their Windstream stock leading up to the sale of Alltel, through which they will pocket a 23 percent premium over the trading price before buyout speculation began in December.

Windstream's stock price, too, has trended upward, trading in the $15 range last week after launching below $12 last summer.

New Network
Windstream is paying back high dividends on top of the cost of transforming the company from a primarily voice model to a broadband model.

Gardner said he expects Windstream to spend between $350 million and $380 million in 2007 on network upgrades like fiber optic lines.

"We know that the future is about speed and reliability, and so we are making investments in fiber for all new subdivisions coming into our markets today. Instead of putting in traditional copper lines, we're putting in fiber. We're connecting more of our remote switches via fiber so that we can push broadband availability deeper into our network. And by the end of the year, 83 percent of our customers will be able to get broadband from Windstream, which is a very high percentage even if you compare us to the urban guys." Gardner said.

During the first-quarter earnings call on May 10, Gardner announced Windstream would begin offering broadband service at speeds of 10-12 megabits per second in some of its markets.

At those speeds, Windstream should be able to recruit and retain more broadband customers as its emerging competitor, wireless broadband, becomes increasingly available and dependable. In the first quarter, Windstream set a quarterly record of 59,000 net "adds" for broadband customers, resulting in a total of 715,000 broadband customers across its service area.

Broadband is but one element of the bundle Windstream is pushing toward its customers. Through its partnership with Dish Network, Windstream can offer video, meaning the full telecom triple-play. Last quarter, Windstream also set a record for 35,000 net adds for Dish customers, resulting in 122,000 total Dish customers across its network.

But since it's investing in all that fiber, could Windstream be gearing up to offer its own video service over the Internet, like Verizon's FiOS or AT&T's new IPTV?

Gardner said such a "facilities-based" video offering doesn't make financial sense for Windstream right now. However, he said, Windstream is making the right investments in its network to make the move should the economics change.

"Today, with Dish, we've got the triple-play, and it's right off the shelf and ready to go," Gardner said.

Safety Sells
As a rural exchange carrier, Wind-stream isn't seeing the same level of access line losses as the big national companies, like AT&T, which is losing access lines at a rate of 6 to 7 percent a year.

Still, Gardner said, Windstream employees are encouraged to fight to keep every wireline customer.

"We are really trying to create a mindset where it's not a foregone conclusion that we are going to lose these wireline customers," Gardner said.

One of Windstream's newest sales techniques, which it plans to focus on later in 2007, will emphasize the added safety of having a wireline phone in the home in case of emergencies.

The campaign is called "Landline is Your Lifeline." Gardner said it will drive home the point that a wireline phone is the most reliable means one could have in the home for making a 911 call.

Indeed, a wireline phone will still work during a power outage power and allows 911 dispatchers to easily locate the source of a call, according to Jason Barbour, president of the National Emergency Number Association.

Down Stream?
The wireline division was not a strategic part of Alltel before the spin-off, so Alltel did fewer acquisitions related to wireline than to wireless in recent years.

But as a stand-alone company, Windstream looks to follow Alltel's lead and be an active acquirer of rural assets in the next five years, according to Gardner.

"We already have the lowest cash cost per customer in the industry, and every time we do a transaction, we're able to improve that position. And so we're anxious to do deals that focus on other rural properties that we can drive even better cost structure, create synergies and drive better operating results from those markets," Gardner said.

But could Windstream follow Alltel all the way down the line to a private equity sale?

Gardner said it's hard to say for sure, though not likely. There have been private equity purchases of wireline companies in the past. In fact, Valor Communications Group, the Irving, Texas-based company that merged with Alltel's wireline division to form Windstream, was a private equity company that later went public. There haven't been many in the last year, however.

"Our job is to run this company in the best way that we can to preserve as many options as we can for our shareholders," Gardner said.

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Click here to read excerpts from Arkansas Business' interview with Gardner, as well as hear audio of the complete sit down.