Windstream Takes Another Big Gamble

Windstream already has taken a couple big gambles, betting on becoming a business services provider and spinning off its network assets into a real estate investment trust. It now has taken another big gamble, eliminating its dividend.

It likely is never a good sign when a former dividend-paying company eliminates its dividend, as Windstream now has done. There are two ways to look at the move, and both suggest high degrees of risk.

Nearly two decades ago, a few dividend-paying telcos or platform suppliers had to consider eliminating their historic dividends, so severely had the business model become. The potential upside was that such moves would allow the firms to invest scarce capital in plant and other potential growth initiatives, such as making acquisitions.

The big potential downside was that such moves were a gamble; an effort to replace one whole class of investors (dividend seekers) with a new class of investors (seekers of growth). The big gamble, in that regard, was the ability to make the transition from a utility-like business model to a true “growth” profile.

A few firms in such predicaments did cut dividends. Perhaps more firms decided to sell themselves.

It is not yet clear whether Windstream’s move, which will conserve capital, will succeed, long term. The firm already had spun off its network assets into a separate telecom real estate investment trust. The result is that the Windstream operating business actually does not own the networks it uses to provide its retail services.

Windstream, in essence, is a fixed network version of a mobile virtual network operator. It also is a big competitive local exchange carrier with a big incumbent network, sort of on the CenturyLink model.

And that is the gamble Windstream now appears to have taken: move further in the direction of being a business services specialist.
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