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Windstream Holdings Inc. (NASDAQ: WIN) recently surprised us yet again by maintaining its incredibly high dividend yield north of 11%. Now we have an earnings report, and the dividend surprise stands out even more. The most recent earnings report is putting pressure on the shares, but this case about an earnings versus dividend conundrum would be the same even if Windstream managed to slightly exceed earnings expectations.

Earnings of $0.08 per share were a penny shy of expectations, but this was the same a year ago. Revenue declined by almost 3% from a year ago to $1.503 billion, and this was short of estimates as well. The company is highly leveraged and its quarterly dividend is $0.25 per share.

The communications and cloud services provider’s third quarter earnings were weaker than expected. Perhaps the blame can be limited to lower subscribers of voice and digital television, but the company did show strong data revenue as well as sales in its integrated services. Total revenue in services was down 2.6% and product sales were down over 6%.

Windstream ended its third quarter with cash of $73.4 million, lower than the $132 million a year ago. Adjusted free cash flow was $264 million and its capital spending was $187.4 million. Its long-term debt and capital lease obligations were $8.76 billion versus $8.1 billion a year ago.

The issue that always arises is how this company manages its cash flows in a manner in which it can pay higher dividends than it makes in income. Many companies can accomplish this. Some do it for years, as Windstream has managed to accomplish. That being said, most investors are going to look for dividend coverage with higher earnings rather than creative cash flow management.

Again, Windstream’s dividend news was just made this week, and the payable and ex-dates are almost two months out. That implies that no serious dividend news would be coming up potentially for months. If you think that other investors do not have questions about its dividend, then why is the short interest up over 84 million shares?

Windstream shares were down 4.6% at $8.25 in late afternoon trading against a 52-week range of $7.50 to $10.00. Trading volume has also passed 14.8 million shares versus an average of 5.3 million shares.