Skip to Content
Stock Strategist

Dividend Cut Overshadows CenturyLink's Improving Profitability

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

Mentioned:

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.

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

Transparency is how we protect the integrity of our work and keep empowering investors to achieve their goals and dreams. And we have unwavering standards for how we keep that integrity intact, from our research and data to our policies on content and your personal data.

We’d like to share more about how we work and what drives our day-to-day business.

We sell different types of products and services to both investment professionals and individual investors. These products and services are usually sold through license agreements or subscriptions. Our investment management business generates asset-based fees, which are calculated as a percentage of assets under management. We also sell both admissions and sponsorship packages for our investment conferences and advertising on our websites and newsletters.

How we use your information depends on the product and service that you use and your relationship with us. We may use it to:

  • Verify your identity, personalize the content you receive, or create and administer your account.
  • Provide specific products and services to you, such as portfolio management or data aggregation.
  • Develop and improve features of our offerings.
  • Gear advertisements and other marketing efforts towards your interests.

To learn more about how we handle and protect your data, visit our privacy center.

Maintaining independence and editorial freedom is essential to our mission of empowering investor success. We provide a platform for our authors to report on investments fairly, accurately, and from the investor’s point of view. We also respect individual opinions––they represent the unvarnished thinking of our people and exacting analysis of our research processes. Our authors can publish views that we may or may not agree with, but they show their work, distinguish facts from opinions, and make sure their analysis is clear and in no way misleading or deceptive.

To further protect the integrity of our editorial content, we keep a strict separation between our sales teams and authors to remove any pressure or influence on our analyses and research.

Read our editorial policy to learn more about our process.