CenturyLink (CTL): Is the 12% Dividend Yield Worth Buying?

TL;DR

CenturyLink’s roughly 12% dividend yield warrants caution because declining earnings estimates, heavy debt, and weak legacy-service revenue raise concerns about whether the payout is sustainable. The stock offered an 11.5% yield and traded at a 10.5 price-to-earnings ratio, while its 17.8 forward P/E suggested expected earnings declines. Read on to examine the dividend coverage, Level 3 debt, telecom headwinds, and reasons investors found CTL attractive.

Transcript

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Key Insights

• 🏃 CenturyLink's 11.5% dividend yield attracts investors, but caution should be exercised due to concerns about its financial stability.
• 📼 The decline in revenue from legacy communication assets and slow growth of new communication assets create challenges for CenturyLink's stability and growth.
• 🍉 Debt is a major issue for CenturyLink, with its long-term debt more than doubling after the acquisition of Level 3 Communications.
• 👶 The appointment of a new CEO in 2019 may result in a dividend cut as a measure to address the company's financial challenges.
• 😀 The telecom industry as a whole is facing challenges, including the cord-cutting trend and increased competition from value wireless options.
• 🚄 Network upgrades required for high-speed data and new communications are capital-intensive, further straining the financial position of telecom companies.
• ✋ Despite the potential risks, CenturyLink still offers a higher dividend compared to its peers in the telecom industry.

Questions & Answers

Q: Is CenturyLink stock a buy for its 12% dividend yield?

The analysis urges caution rather than treating CenturyLink’s roughly 12% yield as an automatic reason to buy. Its dividend coverage, debt load, expected earnings decline, and weakening legacy communications revenue all raise questions about whether the payout can be maintained.

Q: Is CenturyLink’s dividend reliable?

CenturyLink’s dividend coverage ratio had been below 1 in previous years, indicating that the company could not afford the dividend from its available earnings. Its financial struggles and leadership change also created concern that the dividend could be cut.

Q: Why was CenturyLink’s dividend yield so high?

CenturyLink was paying an 11.5% dividend yield, described as one of the highest yields among dividend stocks at the time. The stock had also fallen 24.2% over the previous year, while concerns about its finances and business performance made the large yield less reassuring.

Q: What did CenturyLink’s valuation indicate about future earnings?

CenturyLink had a price-to-earnings ratio of 10.5 and a forward P/E of 17.8, according to Yahoo Finance. Because the forward ratio was higher than the current ratio, the analysis interpreted this as an indication that earnings were expected to decline.

Q: What was CenturyLink’s main business challenge?

Revenue from legacy communications assets, including landline phones, was declining. Growth from newer communications assets had not been sufficient to offset those losses, creating a revenue-stability problem.

Q: How did the Level 3 Communications acquisition affect CenturyLink’s debt?

CenturyLink’s long-term debt more than doubled after its 2017 acquisition of Level 3 Communications. Combined with a credit-rating downgrade to junk status, that debt created uncertainty about the company’s ability to manage its financial obligations.

Q: How was CenturyLink performing compared with the telecom sector?

CenturyLink shares were down 24.2% over the previous year, making the company one of the weaker performers among the large telecom stocks discussed. Over the same period, the diversified telecommunications services sector returned negative 7.4%, while the S&P 500 returned about 13.04%.

Q: What telecom industry trends threatened CenturyLink?

Cord-cutting, declining legacy communications assets, and competition from value wireless options pressured the telecom industry. Expensive network upgrades for high-speed data and newer communications could also strain telecom companies’ finances and lead to additional debt.

Summary & Key Takeaways

• CenturyLink, a telecom company, is gaining attention due to its high dividend yield of 11.5%.

• The company's financial health, including its coverage ratio and debt load, raises doubts about its ability to sustain the dividend.

• The declining revenue from legacy communication assets and the slow growth of newer communication assets further impact CenturyLink's stability.

• The appointment of a new CEO in January 2019 may lead to a dividend cut as the company tackles its financial challenges.