In fact, the FCF payout ratio has been highly secure and sits at 49% over the last 12 months. However, that doesn’t necessarily mean that the dividend is secure or likely to grow anytime soon.
Note the 25% dividend cut in 2013. That happened because management decided it needed to focus on deleveraging the balance sheet, a wise long-term move. However, it still resulted in a painful cut in income for company shareholders.
Source: Simply Safe Dividends
With over $2.9 billion of the company’s long-term debt was set to come due from 2017-2019 (according to CTL’s latest 10-K) and interest rates potentially set to rise significantly, I consider CenturyLink’s dividend risky despite the low FCF payout ratio due to the likelihood of another deleveraging payout cut becoming necessary.
That’s especially true if high-margin legacy businesses continue deteriorating and management decides that it needs to do another major acquisition to kick start growth. Goldman Sachs also noted in a report from early 2015 that “the key driver of thinning dividend coverage is an estimated increase in cash taxes to $1.25bn in 2016 from $32mn in 2015. This drives the FCF payout from 49% in 2015E to 95% 2016E, with a recovery to only 80%+ thereafter.” Rising cash taxes are another issue to consider.
Of course, not everyone believes the dividend will be cut. A more recent report by Evercore ISI believes the company’s dividend will remain steady through 2020, although it seems to gloss over many of my concerns listed above. Time will tell, but chasing yield to buy what appears to be a low-quality business usually doesn’t work out well for long-term investors.
Dividend Growth Analysis
Our Dividend Growth Score answers the question, “How fast is the dividend likely to grow?” It considers many of the same fundamental factors as the Safety Score but places more weight on growth-centric metrics like sales and earnings growth and payout ratios. Scores of 50 are average, 75 or higher is very good, and 25 or lower is considered weak.
CenturyLink’s Dividend Growth Score is 33, which indicates that the company’s dividend growth potential is somewhat weaker than average. That’s not surprising given the company’s highly leveraged balance sheet, high interest costs, and the threat these pose to the current dividend, much less a higher future one.
As seen below, CenturyLink’s dividend grew at a compound annual growth rate of 24.6% over the last decade. However, the company’s dividend contracted by 5.7% per year over the last five years, resulting from the large dividend cut in 2013.
Source: Simply Safe Dividends
Given that CenturyLink’s internet network remains largely inferior to that of its rivals in most markets, which has resulted in falling market share, it’s not surprising that the analyst consensus is for slightly negative EPS growth over the next decade with zero dividend growth.
Now remember that analyst forecasts, especially long-term projections like this, always need to be taken with a grain of salt. However, given the massive amount that CenturyLink will need to spend to make its internet service competitive in the highly competitive, 5G internet world of tomorrow, this estimate seems pretty reasonable.
