Windstream Corporation (NASDAQ:WIN) has captured the attention of dividend investors everywhere, with an impressive yield that has persisted for years. But with high income comes substantial risk.
I’ve been crafting a premium research report on Windstream that goes into more detail about the rural telecom company. Let’s take a look at some of the specific risks that Windstream faces right now.
Windstream paid $2.4 billion to acquire PAETEC in 2011. At the time, that move made plenty of sense, as CenturyLink, Inc. (NYSE:CTL) had bought data-center company SAVVIS while Verizon Communications Inc. (NYSE:VZ) had bought cloud-computing player Terremark. But now, Windstream is banking on the acquisition bringing dividends in the form of synergy-linked cost savings and additional revenue.
The integration hasn’t gone without hitches. For instance, early on, Windstream decided not to fight FCC allegations connected to PAETEC’s billing practices, instead choosing to adapt its strategy going forward.
So far, though, Windstream still has high hopes on the PAETEC front, having estimated in August 2012 that the reorganization would bring $30 million to $40 million of cost savings as well as $50 million in synergies. As the company continues to execute on billing conversion and other synergy-seeking activities, Windstream needs those benefits to grow. The risk, however, is that unexpected obstacles will lead to the integration process going more slowly than the company hopes. At a critical time from a cash-flow perspective, that’s something Windstream can ill afford.
2. Further consolidation within the telecom industry.
Over the past several years, we’ve seen a big ramp-up in merger and acquisition activity in the telecom space. Although AT&T Inc. (NYSE:T)‘s attempted takeover of T-Mobile failed, more recent activity involving Sprint Nextel Corporation (NYSE:S), MetroPCS Communications Inc (NYSE:PCS), and other well-known companies in the industry have essentially forced everyone to assess their competitiveness from the standpoint that their rivals may form combinations that could effectively shut them out.
Windstream’s focus on business customers could prove to be useful from a defensive standpoint in this regard, as residential customers generally haven’t hesitated to jump ship when better deals arise. Windstream’s sales force has better prospects of retaining business customers who use a wider range of the company’s services. Yet if competitors pick up on the benefits of a business focus, then Windstream could find itself having to defend its turf against incursion from larger industry players.
3. The impact of taxation on dividends.
One factor that was completely out of Windstream’s control came from the fiscal cliff crisis, which resulted in substantially higher taxation on dividends in 2013 and beyond for certain taxpayers. In 2012, Windstream shareholders were generally eligible for a 15% maximum rate on the dividends they received. Yet in 2013, the top rate for high-income investors rose to 20%.
