Can CenturyLink maintain its new dividend after the 2018 annual results? – The crazy fool


Internet service provider actions CenturyLink (NYSE: CTL) are falling again after reporting a solid conclusion until 2018 and a slow but gradual profitability. The real news, however, was the surprising – but not surprising – announcement of the annual dividend cut of $ 2.16 per share to $ 1.00 per share. While the previous performance was ridiculous at 14%, management had indicated that it was solidly based. The new yield is still generous at 7.7% so far and CenturyLink has new plans for this money in the future. Is the new payroll amount viable? The short answer is yes, but there are questions about why.

First, a review of 2018

Following CenturyLink's takeover of Level 3 Communications in 2017, investors may have hoped for better sales results. This has not been the case this year, as traditional telecom services continue to decline. The good news, however, is that the company completed its cost reduction initiatives after the Tier 3 merger a few years in advance, which significantly boosted free cash flow (money remaining after the payment of base and capital expenditures). ).


Complete year 2018

2017 adjusted year *

Change (YOY)


$ 23.44 billion

$ 24.13 billion


Cost of services and products

$ 10.86 billion

$ 11.50 billion


General and administrative expenses

$ 4.17 billion

$ 4.72 billion


Capital expenditure

$ 3.18 billion

$ 4.23 billion


Free movement of capital

$ 3.86 billion

$ 1.57 billion


Total dividends paid

$ 2.31 billion

$ 1.45 billion


Data source: CenturyLink. * Adjustments to account for level 3 acquisition. YOY = from one year to the next.

Due to the aggressive cost reduction associated with the integration of Level 3, CenturyLink's tenuous dividend appeared to be a safe bet, even though the total dividends were increased due to the additional shares. CenturyLink has acquired to help pay for the acquisition. The dividend payment absorbed approximately 60% of free cash flow last year.

Management has stated that it expects free cash flow to decrease by $ 3.1 billion to $ 3.4 billion in 2019, largely due to an increase in capital expenditures (purchase of equipment and equipment). Property, plant and equipment) from $ 3.5 billion to $ 3.8 billion, hence the surprise of some investors. a haircut, since 2.16 dollars a share per year would have brought the dividends paid to about 2.3 billion dollars in total, which is quite within the limits of free cash flow forecasts. With payday falling to only $ 1.00 per share and a total consideration of $ 1.08 billion, the payout ratio on cash flow will be approximately 30%. In summary, the new dividend yield is easily sustainable, as long as nothing radically deviates from CenturyLink's expectations.

The back of an Internet modem with a connected Ethernet connection cable

Source of the image: Getty Images.

The conversation with management becomes intense and personal

But the question remains: why make the cut if it was still feasible? David Barden, Analyst at Bank of Americaasked for more details about the revenue call:

Let me go back a bit and say that I think that almost everyone who bought the title in early December – when Neel [Dev, the chief financial officer] was at the conference talking about a comfort level in the low range of the 70s payment ratio – bought the stock because of the dividend, and now that you have reduced the dividend, you will create a billion additional cash flow per year over a three-year period, this represents a cash flow of $ 6 billion, but you only have $ 3.6 billion of debt maturing, all traded above of the face value, whose return is lower by several hundred basis points again return in shares will be. What is the reason – how do you create value for your shareholders by creating that extra cash flow for which there does not seem to be a lot of immediate uses that are higher and better than making it to the shareholders, whether to maintain the dividend or the share buyback program?

Good question. Where will this money go? We will have to wait and see, because the answer given was somewhat vague. However, it seems that debt reduction and the return of investment in the company are priorities. This could be a good thing, since total long-term debt stood at $ 35.4 billion and cash and cash equivalents amounted to $ 488 million. end of 2018.

In addition, CenturyLink also recorded an impairment charge (a write-down of one business) of $ 2.73 billion on the "Consumer Products Segment" in the fourth quarter. This underlines the pressure experienced by CenturyLink as communication between households has changed rapidly over the last decade. More pressure is coming with the initial launch of 5G mobile phone networks, as Verizon5G Home, intended to replace the traditional broadband Internet service.

Thus, although the timing of the dividend cut may be a surprise, the distribution reduction that CenturyLink has just imposed makes sense. If the Internet Service Provider is to remain a sound and viable business in the long term, it needs liquidity to consolidate its balance sheet and reinvest in new, improved Internet services. The good news is that with a yield of 7.7%, it still seems to be a good stock generating revenue.

Nicholas Rossolillo and his clients own shares in CenturyLink and Verizon Communications. The Motley Fool recommends Verizon Communications. Motley Fool has a disclosure policy.

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