Analysts Are Divided on Windstream Dividend

A source of contention in the Windstream machine is the company’s historic dividend.

The $1 annual dividend, paid quarterly, represents a yield of almost 12 percent at last week’s stock price of less than $8.50. CEO Jeff Gardner says it’s “the best way to create value for our shareholders.”

In 2012, Windstream’s net income was $148 million. The company paid out $588 million in dividends, which came from its $768 million in free cash flow, representing a dividend payout ratio of almost 77 percent.

In late April, Bank of America Merrill Lynch downgraded Windstream’s stock to “neutral,” claiming that while the dividend could be sustainable, the market wouldn't be convinced of it.

Analyst Barry McCarver at Stephens Inc. is confident that the dividend won’t be going away.

“We fully believe the dividend is sustainable for the foreseeable future,” he said.

He said part of the sustainability comes from the company decreasing its future capital expenditures — the very thing that worries consumer advocates.

“If you look at their capex budget of $1.1 billion for 2012, about $350 million of that was fiber to the tower projects,” he said. “Consider those more of a specialized project. We think it will be more like $150 million in 2013. As a result, their capex budget is going to go down.”

He said that will cause the dividend ratio to decrease to 70 percent in 2013 while the dividend itself remains $1 per share.

Donna Jaegers, Windstream analyst for D.A. Davidson of Great Falls, Mont., also feels the dividend is safe.

“They’ve morphed the business,” she said. “They’re compared a lot against CenturyLink and Frontier. One big difference is Windstream’s business revenues are 60 percent of their total revenue. So it comes more from competitive business services than being the incumbent in their franchise areas.”

Both CenturyLink Inc. and Frontier Communications Corp. reduced their dividends in 2012, which caused Windstream’s stock to plummet. Windstream’s business services segment includes its cloud-hosting services, for which it has been building data centers in several states, including one in Little Rock last year. Windstream was trading last week between $8.30 and $8.65, and its stock value hasn’t risen above $9 since February. It was as high as $15 in mid-2010.

“Capex will be about $200 million less this year,” Jaegers said. “That should allow them to have a much lower dividend payout ratio and free cash flow so they can more confidently sustain the dividend.”

She also noted that a number of company executives and board members have been buying shares lately. Director Samuel Beall III, for example, bought 30,000 shares in March for $240,000.