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Windstream Corp. $15 – New York symbol WIN

WINDSTREAM CORP. $15 (New York symbol WIN; Income Portfolio, Utilities sector; Shares outstanding: 476.8 million; Market cap: $7.2 billion; WSSF Rating: Average) provides traditional telephone services to over 3 million customers, mainly in rural areas across 16 states. It also offers Internet access and business communication services.

The company took its present form in July 2006, when Alltel Corp. merged its telephone operations with Valor Communications Group Inc.

Alltel investors received a tax-deferred dividend of 1.0339267 shares of Windstream for each Alltel share held. The spin-off let Alltel focus on its wireless operations.

Windstream’s main appeal is its $1.00 dividend, which yields 6.7%. Although the phone business is growing slowly, as more people switch to Internet-based services, Windstream’s annual cash flow of about $2.00 a share is enough to cover the dividend.

The company plans to limit capital spending in 2007 to about $0.70 a share, mostly to upgrade its high-speed Internet services. It also hopes to hang on to customers with a new digital TV service.

Windstream’s long-term debt of $5.5 billion is a high 9.1 times its equity of $602.9 million. Many spinoffs start out with low book equity, but lots of goodwill developed internally, which doesn’t appear on the books. This makes their debt-to-equity look worse than it is.

The company now plans to sell its directories operation, and use $250 million of the $525 million proceeds to pay down debt. It will use the remaining $275 million to buy back stock. Windstream’s shares now trade at just 14.3 times the $1.05 a share it will probably earn in 2007.

Windstream is a buy.

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