It operates in 16 states… in the sticks! Off-the-beaten-path markets, where big carriers like AT&T and Verizon don’t focus because the upfront costs are too high. Just to give you an idea, in most suburban and urban markets the number of access lines per square mile are over 110. In most of Windstream’s markets it’s below 20.

Obviously, this lack of competition confers notable advantages on Windstream. Namely, high and steady profit margins. Even in this declining market, Windstream’s been able to maintain its operating margin of 35%.

Even better, at current prices, the stock yields 12%. (In comparison, GE currently yields 3.4%).

Here are the four main reasons I believe this dividend is safe:

• Wide Economic Moat. Many carriers are losing traditional phone customers to cable phone services. However, Windstream is partially insulated from this trend. About 30% of its customers don’t even have the option to get cable modem services. The cable companies just don’t serve those markets. At the same time, the severities of this recession are forcing many larger carriers to cutback or suspend expansion efforts into Windstream’s territories. The delay only allows the company to solidify its competitive position and minimize the impact of new entrants over the long term.

• It’s Growing for Free. The big old honking stimulus bill included $7.2 billion in funds for Internet expansion. Windstream qualifies for the grants and can use the “free” money to expand its footprint in rural markets.

• Solid Cash Flow. In the last year, cash flow improved 14% to $763 million thanks to lower capital expenditures and cost cutting efforts. In 2009 we can expect the same, as management doesn’t anticipate the need to increase capital expenditures.

• Credit is No Concern. Windstream’s got a sizable $5.4 billion debt balance, but it’s reasonable relative to cash flows (interest expense should consume less than 28% of cash flow), lower than the industry average leverage and there’s no immediate need for refinancing. The earliest debt maturity is in 2011 for $457 million. If necessary, the company could pay off the balance from current cash flows and the money in the bank. After that, the next significant debt maturity doesn’t come until 2013.

Like TEPPCO, Windstream comes with a kicker - it’s also a takeover target.

In the last five years we’ve seen larger carriers, eager to juice growth, acquire rural carriers with high margins for a hefty premium. Windstream possesses the same qualities of past takeover targets, so a deal is certainly possible in the next six to nine months. A cheap valuation, at just 9.5 times forward earnings, increases the odds.

Bottom line, Windstream provides reliable income and the potential for significant capital appreciation like we witnessed with TEPPCO. Sadly, we can’t say the same about GE. So dump it if you own it! And Buy Windstream instead.

Good investing,

Lou Basenese