Windstream Gets Its REIT and a Way to Avoid U.S. Taxes

NEW YORK (TheStreet) -- Shares of Windstream Holdings (WIN) continued to soar a day after news the Internal Revenue Service granted the company's request to spin off part of its telecommunications assets into a publicly traded real estate investment trust, or REIT. This move will allow Windstream to avoid paying federal income tax on what had been taxable earnings.

Windstream shares, at around $11, are now up nearly 43% for the year to date.

REITs have grown in popularity over the years as a way to shelter income from taxes. REITs do not pay income tax as long as they distribute at least 90% of their taxable earnings to shareholders in the form of dividends. In this era of tax inversion, this latest move could become a watershed event for both the cable and telecommunications sectors.

Wall Street applauded the move, sending shares of other telecom stocks up including CenturyLink  (CTL), AT&T (T) and Verizon Communications (VZ). This IRS ruling opens up the possibility for large corporations in these sectors to avoid paying taxes rather than more their assets offshore by buying a foreign company.

According to Oppenheimer analysts Timothy Horan and Jonathan Michaels, "We have seen the REIT Data centers and Towers trade 30%-40% higher than non-REITs by avoiding taxes... For our sector, we believe this means that every network stock we cover is roughly 20% undervalued at this point, as they should be able to largely avoid paying taxes going forward."

Under the plan announced by Windstream and approved in the IRS private letter ruling, the new REIT will issue $3.5 billion in new debt, thus reducing the parent company's debt load by $3.2 billion. This move also generates an additional $115 million per year in free cash flow. The new REIT could be used to pick up other assets from other telecoms looking to reduce their own tax bills.

In a new era of corporate tax dodging, this latest IRS-approved financial maneuver is likely to prompt other companies in other sectors to look very closely at the plan. With all the attention on stopping the movement of assets offshore, this new strategy by Windstream could pick up steam fast.

At the time of publication, the author held no positions in any of the stocks mentioned, although positions may change at any time.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

TheStreet Ratings team rates WINDSTREAM HOLDINGS INC as a Buy with a ratings score of B-. TheStreet Ratings Team has this to say about their recommendation:

"We rate WINDSTREAM HOLDINGS INC (WIN) a BUY. This is driven by some important positives, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its good cash flow from operations, solid stock price performance, notable return on equity and expanding profit margins. We feel these strengths outweigh the fact that the company has had sub par growth in net income."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • Net operating cash flow has slightly increased to $319.80 million or 4.99% when compared to the same quarter last year. The firm also exceeded the industry average cash flow growth rate of -14.28%.
  • The company's current return on equity greatly increased when compared to its ROE from the same quarter one year prior. This is a signal of significant strength within the corporation. In comparison to other companies in the Diversified Telecommunication Services industry and the overall market on the basis of return on equity, WINDSTREAM HOLDINGS INC has underperformed in comparison with the industry average, but has greatly exceeded that of the S&P 500.
  • Compared to its closing price of one year ago, WIN's share price has jumped by 28.17%, exceeding the performance of the broader market during that same time frame. Looking ahead, the stock's sharp rise over the last year has already helped drive it to a level which is relatively expensive compared to the rest of its industry. We feel, however, that other strengths this company displays justify these higher price levels.
  • The gross profit margin for WINDSTREAM HOLDINGS INC is rather high; currently it is at 52.84%. Regardless of WIN's high profit margin, it has managed to decrease from the same period last year. Despite the mixed results of the gross profit margin, the net profit margin of 1.09% trails the industry average.
  • WIN, with its decline in revenue, slightly underperformed the industry average of 3.5%. Since the same quarter one year prior, revenues slightly dropped by 2.1%. The declining revenue appears to have seeped down to the company's bottom line, decreasing earnings per share.

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