Prior to this change, CenturyLink was spending about $1.8 billion a year in dividends. Under the new strategy, the company would pay about $1.35 billion in dividends, and repurchase about $1 billion in shares. Between the new dividend amount and share repurchases, this represents a 29.72% increase in the cash being returned to investors over the next two years.
The challenge of course is that CenturyLink has to follow through with these share repurchases. At this point, investors have to take the company’s word. If it delivers, CenturyLink would retire nearly 9% of their diluted share count over the next two years. This is significant and shouldn’t be overlooked.
In the end, CenturyLink is trying to pay a competitive dividend, repurchase shares, and maintain a strong balance sheet. If you look at the company’s debt-to-equity ratio of 1, the company actually has one of the strongest balance sheet’s in the industry. Only AT&T has a better debt-to-equity ratio at 0.60. The remaining companies have ratios of 1.23 at Verizon, 1.93 at Frontier, and 6.31 at Windstream.
The Bottom Line
Investors don’t seem to like the news, but in the long run it’s the right thing to do. CenturyLink should retire a significant amount of shares in the next two years, while still paying a competitive dividend. After today’s drop, the new yield is almost 6.7%. While this falls behind Frontier at 8.89%, Frontier isn’t buying back $2 billion in shares. Windstream’s over 10% yield is likely the next to fall, due to the company’s high free cash flow payout and highly leveraged balance sheet.
If investors want to buy shares in a company and not worry about the dividend, either AT&T or Verizon would fit the bill. While A&T’s yield of 5.1% and Verizon’s yield of 4.6% don’t get the same attention as the local telecoms., investors can rest easy that their yields will grow over time.
The bottom line is that CenturyLink’s plan is unpopular right now, but the share repurchases should put a floor under the stock, and improve earnings per share. For investors like myself that bought prior to the cut, we are still sitting on a pretty nice yield. This new strategy isn’t the terrible news that everyone seems to think it is.
The article The News Isn’t Really That Bad originally appeared on Fool.com and is written by Chad Henage.
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