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

Who wouldn’t be interested in a yield of more than 11%? If investors’ expectations are realistic, they would be very happy with a 10% or more return from their investments over time. Since you could also reinvest these dividends to raise your effective yield, over time you would have an even better chance of outperforming the market. However, as the old saying goes, if it looks too good to be true it probably is. Such is the case with Windstream Corporation (NASDAQ:WIN).

Don’t Get Me Wrong
I really want to like Windstream Corporation (NASDAQ:WIN). My portfolio is weighted toward dividend paying stocks, and I love high yields. Windstream Corporation (NASDAQ:WIN) also talks a good game. The company’s CEO Jeff Gardner said in their earnings release, “Windstream continues to produce substantial free cash flow that enables us to invest in our business, and reduce our debt, while continuing to pay our $1 annual dividend.” What’s even better is, he recognizes the company’s heavy debt load by saying, “we plan on directing excess free cash flow – after our dividend – to debt repayment.”

There are some positives to Windstream Corporation (NASDAQ:WIN) and their recent results. The company saw sales to enterprise customers increase 6% on a year-over-year basis. Windstream Corporation (NASDAQ:WIN) also saw a 1% increase in high-speed Internet customers, which was on par with competitor CenturyLink, Inc. (NYSE:CTL) and their just less than 1% increase in broadband customers. This increase was better than the nearly 2% decrease in data and Internet revenue that Frontier Communications Corp (NASDAQ:FTR) reported recently. However, none of these local companies could compete with the 12.6% increase Verizon Communications Inc. (NYSE:VZ) reported in FiOS Internet customers.

Yeah, It’s That Bad
Here’s the problem, Windstream’s financials are some of the worst in the industry. Let’s face it, this company’s main attraction is their 11.79% yield. Whether this yield is sustainable should be of utmost importance. Based on recent results, this just isn’t the case.

One big issue Windstream is facing is their huge debt load. As of the current quarter, Windstream’s debt-to-equity ratio is 7.35. By comparison, Frontier’s debt-to-equity ratio is 2.03. If you look at the debt-to-equity ratios of CenturyLink and Verizon, you get 0.97 and 1.23, respectively.

Think about those numbers for a minute. Windstream is carrying 650% more relative debt than CenturyLink, and more than 260% more relative debt than Frontier. Considering both Frontier and CenturyLink have been forced to cut their dividends to maintain their investment rating, what does this tell you about Windstream’s future?

The challenge that this debt creates is the company has to perform well just to cover interest payments. In the current quarter, Windstream’s interest payments used 93.01% of their operating income. The only competitor with a percentage near Windstream was Frontier at 75.89%. CenturyLink and Verizon’s percentages of 44.29% and 11.53% look tiny by comparison. Windstream literally has just less than $0.07 from every dollar of operating income to use for capital expenditures, dividends, and principal repayment. With a margin of error this small, you can see why I’m skeptical when the company says they are going to maintain their dividend and repay debt.