WINDSTREAM CORP. $15 (New York symbol WIN; Income Portfolio, Utilities sector; Shares outstanding: 477.2 million; Market cap: $7.2 billion; WSSF Rating: Average) provides local telephone and other communication services to over 3 million customers in 16 states. Most of its customers are in rural areas.

Windstream took its present form in July 2006 when Alltel Corp. merged its traditional telephone operations with Valor Communications Group Inc.

In the three months ended March 31, 2007, earnings fell 11.4%, to $99.9 million from $112.8 million a year earlier. Per-share income fell 25.0%, to $0.21 from $0.28, due to an 18% jump in the number of shares outstanding. Revenue grew 11.5%, to $783.7 million from $703.0 million. If you assume the merger occurred at the start of 2005 and disregard restructuring costs, Windstream’s revenue would have grown 1.9%.

Like most telephone companies, Windstream is losing customers to cable and Internet-based phone services. The company is now bundling high-speed Internet and satellite TV services with its local telephone service to cut customer losses.

The plan seems to be working. Although local access lines fell 4.5% in the most recent quarter, that’s better than earlier forecasts of a 5% drop.

Windstream aims to sell its directory operations to a minority stockholder in the next few months. It will use $250 million of the proceeds to pay down its long-term debt of $5.4 billion (11.7 times equity), and use the remaining $275 million to buy back stock.

The company has also agreed to buy CT Communications Inc. for $585 million. CT provides basic telephone, wireless and Internet access to about 158,000 customers in rural parts of North Carolina. Windstream feels the merger will let it cut $30 million from its annual expenses.

CT generates plenty of steady cash flow, so the purchase should not hurt Windstream’s ability to maintain its $1.00 dividend (6.7% yield). The stock now trades at 16.3 times its forecast 2007 profit of $0.92 a share.

Windstream is a buy.