What to Look For in This Telecom's Report

Rural telecom Windstream (NAS: WIN) reports first-quarter earnings before Thursday's opening bell. It's been two years since the last time the company beat a Wall Street earnings target. Will this report break the negative trend?

The bar isn't set terribly high this time. Earnings are expected to drop 26% year over year to $0.14 per share. Analysts look for sales to surge 52% to $1.6 billion, but do keep in mind that Windstream spent $2.4 billion to acquire broadband service provider PAETEC last summer. Comparing this year's combined Granny Smith apples to last year's separately operating Braeburn, management expects total revenues to stay roughly flat throughout 2012.

That deal was part of a huge consolidation wave sweeping across the telecom industry. Only months before the PAETEC announcement, CenturyLink (NYS: CTL) picked up data-center operator SAVVIS and Verizon (NYS: VZ) bought out cloud-services expert Terremark. The end result should be cost savings across the industry along with a batch of previously unheard-of communications services. The freshly created combinations of large telecom networks and established data-crunching services should keep the cash machines humming for years to come.

Look for an update on the PAETEC integration in this report. If the combination is going smoothly, Windstream might actually surprise the Street for once.

More to the point, keep an eye on updates to Windstream's cash-flow guidance. Management has set its sights on roughly $900 million of free cash flows in 2012, with a dividend payout ratio comfortably below 70%. You don't want to see cash flows adjusted downward or the payout ratio going up. Frontier Communications (NAS: FTR) is a good example of why we pay attention to this ratio. The company sports an attractive 11.9% dividend yield on the surface, but that is largely because the stock is down more than 60% in the past year. After cutting its dividend in February, continued deterioration in business trends could mean another cut is coming somewhere down the road.

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At the time thisarticle was published

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