EarthLink, Inc. (ELNK): This Stock Is Cheaper and Safer than Its Peers

Windstream Corporation (NASDAQ:WIN) was formed as a result of a merger between Alltel‘s local wireline business and Valor Communications in 2006. While it was previously a rural local exchange carrier, Windstream Corporation (NASDAQ:WIN) successfully expanded beyond its regional footprint of 16 states in 2006 to become a significant player at the national level now serving 48 states in the country. Its consumer and business broadband business segments also grew from below 40% of sales in 2006 to over 70% of 2012 turnover, helping to negate the fall in traditional voice revenues. Windstream has also maintained an annual dividend of $1.00 per share since its inception and sports a forward dividend yield of 12.7%.  However, in my view, the high dividend yield is insufficient to compensate for the financial risks associated with a high gearing of 890%.

TW Telecom Inc (NASDAQ:TWTC) will be one to consider for the patient investor. Its significant investment plans to support future revenue growth in the long term, could possibly come at the expense of weaker financial results in the near term. These investments include expanding distribution research through the hiring of more sales personnel, spending more on innovation to churn out new products and speeding up customer connectivity through upgrading of technology. Given that cash needs to be set aside for such investments, it is not surprising that TW Telecom Inc (NASDAQ:TWTC) does not pay a dividend. Instead, it has spent more than $100 million on share repurchases in 2013 year-to-date.

Conclusion

Notwithstanding Windstream’s high dividend yield of 12.7%, I will not consider it given its huge debt load. I also prefer EarthLink over TW Telecom, given that I believe that a free cash flow generative company should reward its shareholders with dividends. In addition, it is the least leveraged amongst its peers with no significant debt maturities until 2019. EarthLink, Inc. (NASDAQ:ELNK) is also significantly undervalued on both an absolute and relative basis at 4.1 times EV/EBITDA, which makes it a strong investment candidate.

The article This Stock Is Cheaper and Safer than Its Peers originally appeared on Fool.com and is written by Mark Lin.

Mark Lin has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Mark is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.