Windstream Corporation (WIN): One Heck of a Dividend Play

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CITADEL INVESTMENT GROUPWindstream Corporation (NASDAQ:WIN) has a very high dividend – yielding close to 12% – that scares a number of investors, which has only exacerbated the telecom’s downside. The stock has lost close to 30% year to date. Despite the company’s 400% payout ratio on an earnings basis, the annual dividend payout is only $588 million, where the company expects to generate upwards of $950 million in free cash flow for the current fiscal year. Billionaire Ken Griffin - founder of Citadel Investment Group - does happen to be one of Windstream's top-name investors (see Ken Griffin's newest picks).

Windstream’s big acquisition of late was the purchase of Paetec in late 2011. Newly acquired assets are expected to generate 35% of total revenues. The acquisition is expected to help generate over $50 million in synergies this year, and reduce operating expenses by about $100 million and capital expenditure by $10 million annually over the next two years. The telecom has also gained significant momentum in its enterprise market with nationwide coverage of fiber network cables. Some of the biggest initiatives for Windstream have been fiber-to-the-tower deployment and data center expansion. Another key growth avenue will be broadband expansion, with a focus on enhancing coverage and speed in under-served areas.

From a valuation standpoint, Windstream appears expensive at 35x earnings, but its forward P/E of 15x is well below major peers. Our main thesis is that Windstream’s dividend is secure, where its free cash flow payout for 2012 is only 70%. Windstream is also expected to lower capital spending in 2013, which should further strengthen its dividend coverage.

Level 3 Communications, Inc. (NYSE:LVLT) has been growing thanks to the acquisition of Global Crossing’s assets in 4Q 2011. Organic revenues are also expected to rise in the interim thanks to large enterprise and federal customer growth. The Global acquisition should help Level with revenue diversification and debt reduction, but the one downside that remains is debt. The telecom's debt ratio is a whopping 65%, which has put strains on liquidity. We also remain cautious on Level’s future growth prospects, where its 5-year expected EPS growth is at a negative 50% CAGR. Billionaire D.E. Shaw did up his stake 500% last quarter (check out D.E. Shaw's top picks).

What about the rest of Windstream's competitors?

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