Has Windstream Become the Perfect Stock?

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Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?

One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, then decide if Windstream (NAS: WIN) fits the bill.

The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:

  • Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
  • Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
  • Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
  • Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
  • Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let's take a closer look at Windstream.

Factor

What We Want to See

Actual

Pass or Fail?

Growth5-Year Annual Revenue Growth > 15%6.6%Fail
 1-Year Revenue Growth > 12%16.4%Pass
MarginsGross Margin > 35%61.7%Pass
 Net Margin > 15%6.4%Fail
Balance SheetDebt to Equity < 50%908%Fail
 Current Ratio > 1.30.94Fail
OpportunitiesReturn on Equity > 15%36.2%Pass
ValuationNormalized P/E < 2015.35Pass
DividendsCurrent Yield > 2%8.6%Pass
 5-Year Dividend Growth > 10%37.4%Pass
    
 Total Score 6 out of 10

Source: S&P Capital IQ. Total score = number of passes.

Since we looked at Windstream last year, the rural telecom has picked up a point, having boosted its long-term dividend growth substantially. But the company still faces a huge debt load and continuing competitive pressures.

Investors expect big dividends from telecom companies. Around the world, telecoms like Telefonica (NYS: TEF) and New Zealand Telecom (NYS: NZT) attract interest because of their sizable payouts. Here in the U.S., Windstream, along with fellow rural telecoms Frontier Communications (NYS: FTR) and CenturyLink (NYS: CTL) , have come into the spotlight for the same reason: their yields beat out even the fairly high payouts from their larger, more urban-focused rivals.

With those high yields, however, has come concern about whether the dividends are sustainable. The key lies in how well Windstream can capitalize when rural customers decide to migrate from old-fashioned landlines to mobile services. If the company can hold onto those customers and provide them with higher-margin services, the trend may actually help Windstream going forward.

Meanwhile, Windstream continues to try to grow, although not without controversy. Back in August, the company announced that it was buying out PAETEC in a $2.3 billion deal. The merger drew a lawsuit from PAETEC shareholders, but it was settled fairly quickly, and the transaction went through on Dec. 1.

Looking forward, the big question for Windstream is whether it can get its debt levels down. The PAETEC transaction added to the debt burden, but it should also help the company with some cost savings. If Windstream can digest its acquisitions and keep a tight rein on its customers, then it could get even closer to perfection in the years ahead.

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate out the best investments from the rest.

Click hereto add Windstream to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Finding the perfect stock is only one piece of a successful investment strategy. Get the big picture by taking a look at our "13 Steps to Investing Foolishly."

At the time this article was published Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. The Motley Fool owns shares of Telefonica. 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 Fool has a disclosure policy.

Copyright © 1995 - 2011 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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