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Dividend Cut Overshadows CenturyLink's Improving Profitability

Despite the short-term pain, the cut is good news for long-term investors.

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In conjunction with its fourth-quarter earnings release,  CenturyLink (CTL) announced it will cut its annual dividend to $1 per share from $2.16. Given that management constantly implied support for its outsize dividend in the past, this news overshadowed performance by the company that we found encouraging. We believe CenturyLink’s businesses lack an economic moat and have long-term deflationary pricing trends, so we project virtually no sales growth over our five-year forecast. However, management is hitting its synergy targets following the 2017 Level 3 acquisition and showing an ability to increase EBITDA despite continuing revenue weakness. With the company’s 2019 guidance in line with our projections, we expect no major change to our $22 fair value estimate.

Although the dividend cut may be painful for shareholders in the near term because of the stock’s negative reaction to the news as well as the reduced dividend income, we strongly believe the move is good news for long-term shareholders, and we applaud management for making it, although it probably could have foreshadowed the cut in a better way. Given the stated commitment to the dividend, we thought management would hold out until sizable debt maturities hit in 2020, at which point we expected a 50% cut. However, we had also expressed our view that continuing to pay the dividend was not the wisest capital-allocation decision. With CenturyLink now planning to reduce its leverage ratio to around 3 times EBITDA over the next few years (down from 4-5 the past couple of years), we expect more flexibility to take advantage of business opportunities and fewer solvency concerns if market conditions weaken. We’re more comfortable with CenturyLink’s financial position because of this news.

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Matthew Dolgin does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.