Dividend Safety Analysis: CenturyLink
We analyze 25+ years of dividend data and 10+ years of fundamental data to understand the safety and growth prospects of a dividend. CenturyLink’s dividend and fundamental data charts can all be seen by clicking here.
Our Dividend Safety Score answers the question, “Is the current dividend payment safe?” We look at some of the most important financial factors such as current and historical EPS and FCF payout ratios, debt levels, free cash flow generation, industry cyclicality, ROIC trends, and more.
Dividend Safety Scores range from 0 to 100, and conservative dividend investors should stick with firms that score at least 60. Since tracking the data, companies cutting their dividends had an average Dividend Safety Score below 20 at the time of their dividend reduction announcements.
We wrote a detailed analysis reviewing how Dividend Safety Scores are calculated, what their track record has been, and how to use them for your portfolio here.
CTL has a Dividend Safety Score of 26, suggesting that the company’s dividend is riskier than the average dividend stock and should be approached with some caution. This is due to a combination of several factors.
First and foremost is the highly capital intensive nature of the telecom industry, which naturally means the need to take on a lot of debt. CenturyLink’s debt-to-capital is relatively high and has increased over the last decade to fuel the company’s acquisitions.
Source: Simply Safe Dividends
As you can see below, CenturyLink has far more leverage than either AT&T or Verizon. That’s despite the fact that both of those telecom blue chips are still paying down debt from major acquisitions; DirecTV for AT&T, and Verizon’s $130 billion buyout of Vodafone’s (VOD) 45% stake in Verizon Wireless.
| Company | Debt / EBITDA | EBITDA / Interest | Debt / Capital | Current Ratio | S&P Credit Rating |
| CenturyLink | 2.86 | 5.16 | 54% | 0.58 | BB |
| AT&T | 2.39 | 11.17 | 47% | 0.77 | BBB+ |
| Verizon | 2.50 | 9.61 | 77% | 0.61 | BBB+ |
| Industry Average | 2.59 | NA | 47% | 0.81 | NA |
Sources: Morningstar, FastGraphs, Simply Safe Dividends
Now much of CenturyLink’s debt is also due to acquisitions, which can be a great way for telecom companies to grow their sales, earnings, and cash flow. But the difference for CenturyLink is that it’s junk bond credit rating means that it’s cost of debt, and thus overall cost of capital, is much higher than AT&T’s or Verizon’s. This means that any acquisitions are less accretive to free cash flow, or FCF per share. That in turn makes it much harder to grow the dividend.
And let’s talk about that dividend. As you can see, while CenturyLink’s EPS payout ratio is consistently over 100%, the current payout is far safer than this might indicate. That’s because the high levels of depreciation that CenturyLink includes in its earnings calculations actually hides the fact that its FCF is actually quite strong.
Source: Simply Safe Dividends
Source: Simply Safe Dividends
