Dear Valued Visitor,

We have noticed that you are using an ad blocker software.

Although advertisements on the web pages may degrade your experience, our business certainly depends on them and we can only keep providing you high-quality research based articles as long as we can display ads on our pages.

To view this article, you can disable your ad blocker and refresh this page or simply login.

We only allow registered users to use ad blockers. You can sign up for free by clicking here or you can login if you are already a member.

The News Isn’t Really That Bad: CenturyLink, Inc. (CTL)

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 and is written by Chad Henage.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

DOWNLOAD FREE REPORT: Warren Buffett's Best Stock Picks

Let Warren Buffett, George Soros, Steve Cohen, and Daniel Loeb WORK FOR YOU.

If you want to beat the low cost index funds by 19 percentage points per year, look no further than our monthly newsletter.In this free report you can find an in-depth analysis of the performance of Warren Buffett's entire historical stock picks. We uncovered Warren Buffett's Best Stock Picks and a way to for Buffett to improve his returns by more than 4 percentage points per year.

Bonus Biotech Stock Pick: You can also find a detailed bonus biotech stock pick that we expect to return more than 50% within 12 months.
Subscribe me to Insider Monkey's Free Daily Newsletter
This is a FREE report from Insider Monkey. Credit Card is NOT required.