Fixed-line voice and DSL Internet services provider, Windstream Corporation (WIN) reported that its note holders have submitted $1.04 billion worth of 8.625% senior notes due in 2016. The senior note repurchase offer expires on April 6, 2011.
Recently, on March 14, the company extended the maximum limit to repurchase 8.625% senior notes to $1,100 million from $600 million. Accordingly, to finance the buyback, the company privately placed 7.75% Senior Notes worth $450 million, maturing on October 1, 2021 and 7.50% senior notes worth $600 million expected to mature on April 1, 2023.
Windstream maintains a highly leveraged balance sheet at the end of fiscal 2010, with a 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 count has strained the balance sheet as these are predominantly being funded by 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 flows, mostly generated through the ongoing cost-cutting initiatives, will support the high dividend payout, at least over the near term. Notably, the company’s dividend is well above its Tier-1 peers AT&TInc. (T) and VerizonCommunication (VZ). In 2011, Windstream expects adjusted free cash flows in the range of $863 million to $973 million and a dividend payout ratio of approximately 52% to 59%.
We believe increasing debt may temper the company’s long-term performance, thereby affecting its future dividend payout ratio. However, liquidity concerns are expected to be offset by growth and opportunities going forward. The company’s focus on expanding the broadband business through acquisitions and investments in fiber-to-the-cell projects and data center expansions are also expected to fuel growth.
Currently, we maintain our long-term Neutral recommendation on Windstream. Besides, the company retains a Zacks #3 Rank, implying a Hold rating over the short term.
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