Sometimes picking stocks comes down to avoiding a “too good to be true” scenario. Investors in Windstream Corporation (NASDAQ:WIN) need a little reality check. The stock’s current yield of 11.43% looks very appealing, but a good yield in a dying business is a sure recipe for disaster.
Who’s Buying This?
In the last year, Windstream Corporation (NASDAQ:WIN)’s stock has been as low as about $8, and as high as nearly $11. I know investors always want to recoup their losses, but this investment is going to get scary once the company begins making the hard choices that are coming.
If you look at Windstream’s competition, I’m really not sure what Windstream is doing to turn in these results. The company’s last earnings report shows a business that is struggling to find its footing, and clearly their competition is taking their customers.
The first problem facing Windstream Corporation (NASDAQ:WIN) is that their biggest business is slowly fading. The company made the point that “total consumer and business broadband represent 71% of total revenue.” That sounds great, but the company’s broadband subscriber base shrunk by 5% on a year-over-year basis. When you consider that CenturyLink, Inc. (NYSE:CTL) and Frontier Communications Corp (NASDAQ:FTR) each saw high-speed internet growth of over 1%, and AT&T Inc. (NYSE:T) reported growth of 8.7%, it seems clear that something is wrong with Windstream’s business.
If the company was just struggling with high-speed Internet sales, that would be bad, but their television subscribers are leaving too. This leads us to Windstream Corporation (NASDAQ:WIN)’s second issue; the company saw a 4% decline in digital television subscribers versus last year. By comparison, AT&T Inc. (NYSE:T) and Frontier Communications Corp (NASDAQ:FTR) saw roughly 5% growth, and CenturyLink, Inc. (NYSE:CTL) reported better than 11% growth. Given that high-speed Internet and voice subscriptions are supposed to offset the company’s loss of voice lines, this strategy clearly isn’t working.
Highest Ranked In These 3 Areas, And That’s Not Good News
Windstream Corporation (NASDAQ:WIN)’s problems retaining customers are putting pressure on the company’s finances as well. With a class-leading yield, it makes sense that investors need to know if this yield is sustainable. Based on the company’s performance, let’s just say this yield is less safe than that of any of their peers.
A third issue that suggests Windstream Corporation (NASDAQ:WIN)’s yield is in trouble is their interest expense. Windstream spends relatively more on interest compared to their peers. In fact, as a percentage of operating income, Windstream spent 71.45% of their operating income just by paying interest on their debt. By comparison, Frontier Communications Corp (NASDAQ:FTR) did somewhat better than Windstream, spending 68.34%. CenturyLink, Inc. (NYSE:CTL) led the local telecoms at 40.41%, and AT&T Inc. (NYSE:T)is in a different league with just 13.92% of operating income spent on interest. When a business only has $0.29 out of every dollar of operating income left after paying interest, there isn’t much for capital expenditures, debt retirement, and dividends.
This brings us to problem number four–Windstream’s debt-to-equity ratio is tremendously higher than any of their peers. In fact, in the current quarter, the company’s debt-to-equity ratio was 7.92. Considering that Frontier had the next highest ratio at 2.06, you can see how weak Windstream Corporation (NASDAQ:WIN)’s balance sheet really is. For investors looking for safety, I would suggest looking at CenturyLink, Inc. (NYSE:CTL) or AT&T Inc. (NYSE:T), with debt-to-equity ratios of 1.04 and 0.80, respectively. Think about it this way–Windstream has 187% more relative debt than Frontier Communications Corp (NASDAQ:FTR), and Frontier is already carrying almost double what CenturyLink or AT&T have.
Last but not least, Windstream’s high debt load and interest expense doesn’t leave enough money to cover the dividend. When looking at cash flow, I look at what I call core free cash flow, which is net income, plus depreciation, minus capital expenditures. I know that not all of Windstream’s capital expenditures are maintenance related, but neither are Frontier Communications Corp (NASDAQ:FTR), CenturyLink, Inc. (NYSE:CTL), or AT&T Inc. (NYSE:T). The point is, all of Windstream’s peers have better payout ratios.
CenturyLink, Inc. (NYSE:CTL) actually has the lowest payout ratio at 45.35%, followed by Frontier and AT&T at 60.33% and 61.78%, respectively. Windstream by comparison has a payout ratio of 107.09%. This isn’t the first time the company’s payout ratio has strayed above 100% either. If you want proof that Windstream isn’t generating enough cash, consider that their cash decreased $77.6 million year-over-year, while their long-term debt dropped by just $62,000. These numbers aren’t a surprise considering everything else Windstream is struggling with.
Anyone Else Seems To Be A Better Bet
If you want a high yield, at present Frontier Communications Corp (NASDAQ:FTR) offers an over 9% yield, and is outperforming Windstream Corporation (NASDAQ:WIN)in nearly every category. If you want a good yield of 5.7% with CenturyLink, Inc. (NYSE:CTL), or 4.87% from AT&T Inc. (NYSE:T), these two companies offer safety that the other two companies can’t match.
Windstream’s high yield is like a mirage in the desert. It looks real, you want to believe it’s real, but when you get close, it vanishes. Windstream’s shareholders who are hoping for improved results in the future might see something else vanish–their dividend.
Chad Henage owns shares of CenturyLink. The Motley Fool has no position in any of the stocks mentioned.
The article 5 Signs This Business Is Slowly Dying originally appeared on Fool.com.
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