These 3 Numbers Keep Me from Buying: Windstream Corporation (WIN)

Worst of All
Probably the biggest challenge in believing in Windstream’s dividend is the company’s cash flow situation. The company touted that their full year free cash flow was $768 million, and with $588 million in dividends; this creates a 77% payout ratio. The problem is, free cash flow can include adjustments to accounts receivables, payables, inventory, and more. Since these are accounting adjustments and not real cash inflows, I like to use what I call adjusted free cash flow. The formula calculates real cash inflow and outflow. To get adjusted free cash flow, you take net income, add depreciation and amortization, and subtract capital expenditures. Since this number eliminates a lot of the non-cash adjustments, it gives a truer picture of what a company can afford.

Using adjusted free cash flow, Windstream’s free cash flow payout ratio for the year was actually 161.36%. If you look at the current quarter, the payout ratio is even worse at 256.97% using this same measure. By comparison, Verizon’s adjusted free cash flow payout ratio was 69.33%, CenturyLink’s ratio was 67.16%, and Frontier’s ratio was 59.46%. In plain English, this payout is in serious trouble.

When you add it all up, the future of Windstream’s dividend is very tentative. The company said in 2013 they expect to lower capital expenditures to around $800 million to $850 million. However, even using these projections, the company’s adjusted payout ratio would be 95%. This is simply too high for comfort. Frontier’s yield of 9.78% looks much better, because their interest expense to operating income, debt-to-equity ratio, and payout ratio are all lower than Windstream.

However, if investors want real safety, they might consider either CenturyLink or Verizon. Both companies pay competitive (although not outrageous) yields of 6.24% and 4.52%. These two companies have much more reasonable debt levels, and their payout ratios are sustainable as well. I’m afraid for Windstream investors. Their dividend is anything but sustainable at the current time.

The article These 3 Numbers Keep Me from Buying originally appeared on Fool.com and is written by Chad Henage.

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