Windstream has been an attractive dividend payer for years. But a pullback in the stock last year has some investors starting to question whether the stock is a strong investment.

I've been crafting a premium research report on Windstream that goes into more detail about the rural telecom company. Let's take a look at three key areas that you should keep your eyes on as Windstream tries to put together a rebound.

1. Will Windstream cut its dividend?
More than anything else, Windstream's dividend is the key to its future. Over the past several years, the stock's dividend yield has hovered in the 7% to 10% range, and Windstream has an admirably solid history of keeping its payout stable. By contrast, both CenturyLink and Frontier Communications have gone the other way, with Frontier cutting not once but twice in the past few years and with CenturyLink shocking investors just this month with a 25% dividend cut.


Windstream CEO Jeffery Gardner has said that the company "feel[s] so good about our ability to pay this dividend for a very long time." Yet just as Frontier ended up having to make dividend reductions in part because of its acquisition of landline business from Verizon, Windstream has made some ambitious buys of its own. Moreover, Windstream's free-cash-flow payout ratio has flirted dangerously with the 100% level in recent quarters, even when you allow the company to include adjustments related to its merger and integration costs.

The key for the dividend will be whether the company's PAETEC acquisition starts paying off in greater income and reduced expenses fast enough to keep overall cash flow up. If it falls short, management may reluctantly have to cut its payout.

2. Will commercial customers bail out the landline business?
With huge competition from a number of corners, few analysts dispute that the future prospects for legacy landline telecommunications services are poor. As cable operators fight hard for business across the company, Windstream will likely find itself outclassed. Despite attempts to cross-sell video and data services with the help of partners like DISH Network, the company has had trouble holding on to residential high-speed Internet customers, let alone its traditional landline business.

Windstream hopes that demand for business communications and cloud-computing data center services will make up for weakness in its residential business. Most of the pick-up on that side of the business has come from the PAETEC acquisition, yet despite the highly competitive environment for that segment as well, it nevertheless diversifies Windstream in a way that some of its rural telecom peers have not.

3. Can Windstream maintain its debt?
Debt is always a big burden for telecom companies to manage. Thus far, Windstream has done a pretty good job of ensuring long-term access to capital. Of the more than $5 billion in notes that Windstream has issued, only the $800 million due to mature in August 2013 is short-term debt. Other maturities range from late 2017 to 2023. Moreover, bonds that Windstream's subsidiaries have issued, which amount to another $1.3 billion, also have several years to run.

Windstream's senior secured credit facilities, on the other hand, are a different story. With more than $2.5 billion in debt associated with the facilities, more than half will come due by December 2015 or earlier, with $300 million due in July 2013. Currently, conditions in the corporate bond market are extremely favorable, and if they persist, Windstream should be able to get favorable terms when it refinances that debt. But if credit markets get tighter, then higher interest costs are a possibility.

Watch Windstream
Thanks for tuning into this series on Windstream. By keeping abreast of developments in the rural telecom industry, you can make an informed decision about whether the high dividend yields that Windstream and its peers offer are worth the risk.

Like Windstream, Frontier Communications has tempting dividend yields, but every Frontier investor has to understand that it's not a sure thing. In our premium research report on Frontier, you'll get our analyst's views on whether Frontier's dividend is sustainable at current levels, as he walks you through all of the key opportunities and threats facing the company. Better yet, you'll receive a full year of updates to boot. Click here to learn more.

The article Windstream: 3 Areas Investors Must Watch originally appeared on Fool.com.

Fool contributor Dan Caplinger has no position in any stocks mentioned. You can follow him on Twitter @DanCaplinger. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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