Too Many Headwinds for Windstream

 | Jan 07, 2013 | 10:30 AM EST
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Here's one to stay away from.

Windstream (WIN), a telecommunications company based in Little Rock, Ark., is the best performer in the S&P 500 year to date (through Friday), having gained more than 12%. But I don't expect these good times to roll on.  

To begin with, Windstream labors under a heavy debt load. At the end of September, net debt was approaching $9 billion, or 7x stockholders' equity. More than $3 billion of that debt is due to be paid or refinanced by the end of 2015.

The big attraction here is the dividend yield, which is now close to 11%. Windstream has paid out $0.25 each quarter like clockwork since late 2006.

But how long can the company continue to pay $1 a year in dividends when it hasn't even earned that much since 2007? In the past four years, Windstream has notched profits of $0.93 a share, $0.76, $0.66 and $0.33 -- less every year.

For the year just ended, analysts guess the company earned about $0.43 a share. That's a dime better than in 2011, but still way below what's needed to sustain a $1 dividend.

For the next three years, analysts predict annual earnings to range from $0.55 to $0.71 a share.

20 analysts follow this mid-cap telecom company, which specializes in phone and Internet service for people who live in rural areas. Six call it a buy, four a sell. The other 10 are neutral.

My contrarian instincts might be aroused by that, except that I can't see Windstream as much of a bargain. The stock fetches more than 16x earnings and more than 4x book value, or corporate net worth. To make matters worse, the book value consists largely of goodwill. 

Why has the stock popped so far in 2013? It's largely due to relief from dividend-oriented investors -- in the fiscal-cliff compromise, Congress only mildly increased the tax on payouts. (Some investors will keep paying the recent 15% tax rate on dividends, while others with higher incomes will pay 20% -- still much better than some proposals that had been discussed.)

I think that sigh of relief has now been breathed, and I expect Windstream to be a below-market performer for the remainder of the year.

John Dorfman is chairman of Thunderstorm Capital LLC, a money management firm in Boston. He can be reached via email here. At the time of publication, he had no position in the stock discussed above.

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