Fixed-line voice and DSL internet service provider, Windstream Corporation (WIN) announced the successful completion of its previously announced private offering of 7.75% Senior Notes worth $450 million, expected to mature on October 1, 2021.
Earlier, the company had issued 7.50% senior notes worth $600 million due April 1, 2023. Windstream will utilize these amounts to buy back a total of 8.625% senior notes worth $1,100 million, due 2016.
Windstream had a highly leveraged balance sheet at the end of fiscal 2010, exhibiting a heavy debt, minimal cash balance and a leverage ratio of 3.66%. The company had roughly $7.2 billion in long-term debt, up from $6.3 billion at the end of 2009. Cash and cash equivalents plummeted to $42.3 million from $1,062.9 million in the prior year.
The company’s ongoing acquisition spree to expand its coverage market and subscriber base has strained the balance sheet, which is predominantly being funded through debt. Despite the highly leveraged balance sheet, the company reported adjusted free cash flows of $818 million in 2010 that resulted in an impressive dividend payout ratio of 57%.
Windstream’s healthy free cash flow, mostly generated through the ongoing cost-cutting initiatives, will support the high dividend payout going forward. Notably, the company’s dividend is well above its Tier-1 peers AT&T Inc. (T) and Verizon Communication (VZ). For 2011, Windstream expects adjusted free cash flows in the range of $863 million to $973 million and dividend payout ratio of approximately 52% to 59%.
We believe increasing debt may impact the company’s long-term performance, which in turn will affect its future dividend payout ratio. However, liquidity concerns are expected to be offset by growth and opportunities ahead. The company’s focus on expanding its broadband business through acquisitions and investing in fiber-to-the-cell projects and data center expansions are also expected to fuel growth.
We, therefore, maintain our Neutral recommendation on Windstream over the long term. Windstream holds a Zacks #3 Rank, implying a Short-term (1-3 months) Hold rating on the stock.
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