It’s appropriate that Windstream Corporation (NASDAQ:WIN) has the word wind in its name, because to be blunt, this company is full of hot air. When a company pays a yield of more than 12%, investors may lose sight of the challenges facing the business. While no business is immune to competitive pressures, Windstream Corporation (NASDAQ:WIN) faces challenges of its own making. The truth is, this company is slowly spending itself into oblivion.
A tough business with huge competition
Unless you live under a rock, you probably know there are just a few companies that want your money when it comes to telephone, high-speed Internet, and video (i.e. television) services. In most areas the competition is fierce, but limited to just a few players.
Local telecommunications companies like Windstream Corporation (NASDAQ:WIN), Frontier Communications Corp (NASDAQ:FTR), and CenturyLink, Inc. (NYSE:CTL), all have similar challenges. Each company is trying to grow its high-speed Internet and video offerings at a rate fast enough to offset declines in their traditional voice services. To attract investors, each company pays a relatively high-yield.
On the other side of the coin, you have larger players like Verizon Communications Inc. (NYSE:VZ). The company not only competes with the local guys for telephone, video, and Internet access, but of course also has a huge and growing wireless business as well. While Verizon Communications Inc. (NYSE:VZ) doesn’t pay as high of a yield as the rest, I think few would argue that Verizon’s dividend is far safer than their smaller competition.
The difference between an opportunity and hot air
There is no doubt that investors can benefit from a nice dividend yield, as studies have shown that dividends can provide almost half of a stock’s total return. However, a dividend is only as attractive as the company writing the checks.
Anyone who has ever tried to work with a budget understands the challenges of having to make payments on a debt. Imagine if your debt payments took all but $0.29 of each dollar you made. In essence, this is the situation Windstream Corporation (NASDAQ:WIN) finds itself in, and the first reason the company’s dividend promises are just hot air.
In the last quarter, the company used 71.15% of their operating income to meet interest expenses. By point of comparison, Frontier Communications Corp (NASDAQ:FTR) used 62.57% of their income, CenturyLink, Inc. (NYSE:CTL) used 45.45%, and Verizon used just 7.84%. With such a large amount of money being used on interest payments, investors should correctly question if Windstream Corporation (NASDAQ:WIN) can afford the current dividend.