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Windstream (WIN): A Sweet Dividend Gets Safer

 January 22, 2013 09:45 AM

(By Kevin Donovan) Rarely does Washington ride to the rescue, but it recently snatched dividend darling Windstream Corp. from the tracks, giving shareholders a reason to hang on.  We think income investors with an appetite for risk could profit by joining them.

Since its spinoff from Alltel (itself subsequently bought by Verizon Wireless), business telecommunications and network provider Windstream has rewarded shareholders with a generous dividend.  With a debt-heavy balance sheet and shrinking cash flows, the sustainability of that payout has been a big concern for income-oriented investors.

However, free cash flow got a huge boost from the "fiscal cliff" deal, sending Windstream shares sharply higher as investors gained confidence the company can maintain its generous dividend.  The company recently lowered its 2013 tax expense guidance to $40-50 million from $250 million to reflect the extension of bonus depreciation into 2013 that resulted from the fiscal cliff deal.

[Related -Pitney Bowes (PBI): Is That High-Yield Stock Really A 'Dividend Trap'?]

Free cash flow fell to $99.5 million in the third quarter from $122 million and $212 million in the second and first quarters, respectively.  With a payout of about $147 million in dividends per quarter, the ratio of dividends to free cash flow was a troubling 148% in the third quarter, raising doubts about the sustainability of the $0.25 per quarter dividend, which at the current stock price yields an outsized 10.38%.   

But the last-minute tax deal will pour plenty of cash into the bucket used to pay dividends, providing a comforting cushion.

Meanwhile, though it's still early days for the technical minded,  we see a potentially bullish head-and-shoulders pattern since the stock hit a 52-week low in November, with the right "shoulder" shooting higher than its brother on the left.  The move has been dramatic with the stock rising more than 16% in just two weeks.   Also of note, insiders Dennis Foster, chairman of the board, and Jeffery Gardner, president and CEO, bought shares in November, hardly the harbinger of a dividend cut.
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