Given the company’s high interest expense, it should come as no surprise that Windstream Corporation (NASDAQ:WIN) has the worst dividend payout ratio of the group as well. If you are looking for the second reason Windstream’s dividend is full of hot air, look no further than their payout ratio.
When looking at cash flow, using a metric called core free cash flow (net income + depreciation – capital expenditures) helps to eliminate some of the accounting changes on the cash flow statement that can be manipulated by companies.
Using this measure, we find that Windstream’s payout ratio was 103.35% in the last quarter. As you might guess, none of Windstream’s competition has a payout ratio quite as high. Frontier Communications Corp (NASDAQ:FTR) used 69.56% of their core free cash flow, CenturyLink used 47.32%, and Verizon used just 27.52%. Clearly Windstream has a problem affording its current dividend.
The snowball effect
Like a snowball rolling down a hill, Windstream’s high interest expense causes a high payout ratio, and the company’s high payout ratio causes the company to leverage up their balance sheet. Windstream’s significant leverage is the third reason this dividend is full of hot air.
What’s ironic is Windstream’s CEO Jeff Gardner said, “…we continue to strike a prudent balance among reinvesting in the company, paying an attractive dividend and reducing debt over time.” Unfortunately for the company’s investors, this “prudent balance” includes more debt not less.
In fact, Windstream’s balance sheet shows significant leverage with a debt-to-equity ratio of 9.37. In a recurring theme, none of the company’s competition struggles with this relative amount of debt. Frontier Communications Corp (NASDAQ:FTR)’s debt-to-equity ratio is 2.01, CenturyLink sits at 1.1, and Verizon comes in at just 0.48. What should really scare investors is the story is getting worse and not better.
Just a few months ago, Windstream’s yield was 11.43% and their debt-to-equity ratio was 7.92. Today, investors get a higher yield at 12.2%, but the company’s balance sheet is in worse shape. The bottom line is, this business is in trouble and the dividend is anything but safe. Income focused investors should steer clear of this dividend cut waiting to happen. The company’s dividend promises seem to be full of hot air. If the dividend is cut, it will be investors’ hard earned money that could blow away with the wind.
The article 3 Reasons This Company Is Full Of Hot Air originally appeared on Fool.com and is written by Chad Henage.
Chad Henage owns shares of Verizon Communications (NYSE:VZ) and CenturyLink. The Motley Fool has no position in any of the stocks mentioned.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.
