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Published: December 3, 2009
When there's no competition for your
services, you can pretty much charge whatever you want,
advertise as little as you want, and pay dividends to your
investors for as long as you like.
That's how defense contractors and refiners have operated for
many years, and that's how regional telecom players operate
today, including this 10%-yielding company.
It's able to do this because from where it operates -- in rural
areas of the country -- there is often only one provider of
telephone, high-speed Internet and cable television. The company
charges more than its city-dwelling peers and also spends less
on advertising. And it's buying up rivals at a frenzied pace.
This type of operating procedure has made telecom stocks one of
the best sectors for income right now. In fact, four out five of
the highest yielding stocks in the S&P 500 are telecom
companies.
Windstream (NYSE: WIN) is one of those top S&P dividend
payers. This $4.5 billion company has about three million
customers (a third of whom are high-paying business customers)
in 16 states. The company offers telephone, high-speed Internet,
and high-definition digital TV services.
But isn't the land-line telephone going the way of the dinosaur?
Sort of, but not really. While the number of landlines is
decreasing, they won't disappear any time soon. Today 80% of
homes in the United States still have landlines, and during the
past year that number shrunk by just 3%.
At the same time, companies like Windstream are growing by
selling high-speed Internet and high-definition television
packages. The company added 71,700 high-speed Internet customers
in the first nine months of the year, bringing its total number
of subscribers just over the million mark, compared with 962,000
as of Sept. 30, 2008.
The company is also growing through acquisitions. Windstream
acquired Pennsylvania-based rural phone and Internet service
operator D&E Communications in November, and recently concluded
its acquisition of privately held rural North Carolina carrier
Lexcom, adding 223,000 access lines, 53,000 high speed Internet
customers and 12,000 cable TV subscribers. Windstream expects
that these acquisitions will be accretive to earnings in 2010.
The company recently announced two other acquisitions. Last
month Windstream agreed to buy Iowa Telecom for $530 million and
NuVox for $643 million. When completed, Windstream will see its
customer base jump to 3.3 million, from the current 2.9 million,
with 1.1 million broadband customers, compared to today's 1.05
million.
In the third quarter ended Sept. 30, revenues fell -7% from the
same period in 2008 to $734 million. Net income fell -4% to
$0.24 per share. Windstream's dividend payment is currently
$0.25 per share quarterly, or $1.00 per year. At current prices,
that gives the company a 10% yield.
Windstream issued debt for the completed acquisitions and plans
to issue more debt for the upcoming ones. Total debt on the
books as of Sept. 30 stood at $5.3 billion compared with total
equity of just $190 million. But the company can handle the
debt, as earnings before interest and taxes in the most recent
quarter covered interest expenses by a factor of 2.3. Plus, no
major debt is coming due until 2013.
Even with the high levels of debt, the dividend looks safe.
Telecoms often have large depreciation expenses that eat into
earnings, but these are a non-cash expense. Despite lower
reported earnings, Windstream saw free cash flow of $185 million
in the third quarter, versus dividends paid of $110 million.
This growing 10% yielder should be able to continue its dividend
payments until the effects of the acquisitions boost earnings,
since they are easily covered by free cash flow.
-- Anthony Haddad
Staff Writer
StreetAuthority
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