Windstream, My friend or foe?

I was sitting at my desk and got an alert on my phone.  The price of WIN jumped way up (52 week high of $13.30).  I was very curious as to why but since my time is not my own I had to wait until lunch to see what was going on.

Looks like Windstream (WIN) is going to attempt to spin of assets into a publicly traded REIT.  I have a 37% of my taxable portfolio allocated to WIN.  I used to work for the company so I understand the business.  However I purchased these stocks before I knew much about dividend investing and evaluating stocks.  I did a quick screen of stocks under $15 dollars that had the highest yield.  Never even looked at the P/E, dividend growth rate, or even knew what a dividend aristocrat was.  

That was about four years ago and not much has changed with the company.  Yes I collect a nice dividend every quarter but it hasn't moved and neither has the companies stock price.  Then along comes this year.  I can only guess this spin-off was a rumor or people were flocking to dividend stocks in fear of a market crash.  The company is up over 50% just this year.  I had a better metric but deleted the alert from my phone.


Friend

The presentation I went through points out allot of good things that will come from this.  Windstream has allot of assets including buildings, land and FIBER.  It is one of the top 5 fiber networks in the U.S.A covering 48 states.  I believe Hawaii and Alaska are the 2 not covered.  It is a cash cow telecom that has managed to stay alive and pay a $1/share annual dividend.

They plan on splitting the assets into a REIT most likely to avoid the huge tax bill that they get hit with.  This is good because the REIT will be the most tax efficient mechanism while still allowing some capital for acquisitions and growth on the asset side of things.  I think that is pretty smart.  Why have one large business that has limitations when you can have two that allow for growth and change on one side and asset management returning money to shareholders on the other.  The division allows each company to focus on on those goals individually and with a greater chance of success.  

The payout ratio for WIN then drops to 10-25% which is nice and the REIT follows the dividend guidelines for that sector.  The expected free cash flow also gets a boost from $830 million to a combined $946 million.  This is probably a result of tax savings and the revenue adjustments.  I am not an accountant so I don't see how you can go from $5.9 billion in revenue to $6.55 billion.  For now I will go with it as I am sure there are reasons (growth, acquisitions, funny money.)

There was an article in one of the blogs I read that was about companies that split tend to do well over the long run.  If you wrote that article let me know and I will update this post.  My limited time writing this prohibits me from spending too much time searching.

On the plus side all other telecom type stocks also saw a boost today.


Foe

I did not see any dividend growth rate projections for either WIN or the newly created REIT.  They are saying the original $1/share annual dividend will become just $.10 cents/share for WIN and $.60 cents for the REIT.  So a negative 30% change to just $.70 cents a share annually.  From my perspective that is a dividend cut.  Sure I will have twice the number of shares (if that is how they split it).  Double shares will lead to higher payouts for me but until I see that stock in my account I am not so sure.

Tax rates may change for me as well since the REIT dividends may be taxed as ordinary income or qualified dividends.  This may further reduce the yield I was getting prior to the split.

Now if the stock price goes up for both companies because they achieve the goals they have set forth this won't be to bad.  If the dividend growth rate is better than 0 (like the current) and actually keeps up with inflation or better this is good for shareholders.  I guess only time will tell.  For now I am holding on.

Should I stay or go on WIN?

Full Disclosure: Long on WIN

Comments

  1. I guess you're having a good problem. Yeah, I saw the news on CNBC this morning. I don't know much about the company or industry so can't really say. Seems like companies are looking for ways to create shareholder value in the short term with these weird gimmicks like foreign tax addresses, REITs spinoff, etc.

    ReplyDelete
    Replies
    1. Yeah this is a tough one. Are they doing it to line their pockets or for the shareholders. If the dividend starts to increase then I will be happy.

      Delete
  2. Hi DFG,
    I agree with Henry's comment and I have no knowledge about WIN either, although they have a nice ticker symbol!

    Does the ordinary dividend have any impact to you as far as taxes are concerned? Whatever higher yield the REIT does pay will be reduced by your marginal tax rate and that may affect the overall value to you.

    If you are able to put those investments into an Roth IRA instead of a taxable account that might be a benefit too: You won't need to find new money to invest in the IRA; you gain from the higher yield and avoid the higher taxes. But I'm not a professional financial advisor so I'm just thinking out loud here!

    I've never actually bought stock in a company I've worked for - the typical literature advises not to; but if there's a stock sharing scheme / bonus or something then it can be a good thing.

    Best wishes!
    -DL

    ReplyDelete
    Replies
    1. Hi DL,
      My bracket is currently just 15% since I am the sole income earner in the family. The house drops me into that bracket with the mortgage write-off. So I do end up paying taxes. We will see what happens when the spin-off completes. Then I will determine later whether or not the yield outweighs the taxes.
      -DFG

      Delete

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