**Editor's Note: Click here for a look back to see how some of the biggest names in communications fared in Q3 2012.**
A lot of telecom eyes will be on Windstream on Feb. 19 when the communications giant releases its fourth-quarter earnings statement. In Q3, the company recorded its best quarter-over-quarter revenue improvement ever, but profit was down 44 percent from the same period last year.
There are three key things that investors should watch before plunking down some cash for Windstream shares: the PAETEC integration; more telecom mergers and acquisitions (M&A); and higher taxes on dividends, says Dan Caplinger, a contributor to The Motley Fool, a website that focuses on investing.
Specifically, Caplinger says Windstream "is banking on the acquisition [of PAETEC] bringing dividends in the form of synergy-linked cost savings and additional revenue." The integration of PAETEC – which Windstream paid $2.4 billion for in 2011 – has had some issues, he noted, particularly the company's decision not to challenge FCC allegations about PAETEC's billing practices. Windstream hopes that the integration will save between $30 million and $40 million, plus another $50 million "in synergies." "The risk, however," Caplinger writes, "is that unexpected obstacles will lead to the integration process going more slowly than the company hopes. At a critical time from a cash-flow perspective, that's something Windstream can ill afford."
Regarding more telecom M&A, keep an eye on what the other communications giants are doing. Residential customers don't hesitate to switch providers, so Windstream's "focus on business customers could prove useful from a defensive standpoint ..." Caplinger writes. But watch for other players who might try to horn in on Windstream's territory.
Finally, taxes on dividends will be higher this year — thank the much-ballyhooed "fiscal cliff" for that. The tax rate on high-income investors rises to 20 percent in 2013 compared to a maximum 15 percent rate in 2012.
Follow senior online managing editor @Craig_Galbraith on Twitter.