Dear Mr. Berko:
I’m looking for higher yields, and my stockbroker is recommending that I buy 500 shares of CenturyLink. It pays a wonderful $2.16 dividend that yields about 17 percent. Sometimes the dividend exceeds the company’s net income. For example, last year, CenturyLink earned only $1.10 a share but paid a $2.16 dividend. How can a company continue to pay dividends that are more than its earnings? My broker tells me that when a company’s earnings don’t cover the dividend, management takes the money from cash flow. This is confusing to me. What is cash flow, and how does this work?
— L.B., Waterloo, Iowa
I think your broker is smoking too many of those left-handed Luckys!
CenturyLink (CTL-$13.40), formerly known as Century Telephone, is a dumping ground used by the Federal Trade Commission and the Federal Communications Commission for landline phones that AT&T and Verizon want off their books. When a large telecommunications company decides to acquire more cellphone customers, the cockamamie government agencies tell the telecom how many landline phones to divest from its customer portfolio. CTL has benefited nicely from the Verizon and AT&T handoffs and has become the third-largest telecom in terms of yearly revenue ($23.47 billion) in the U.S. of A.
CTL provides broadband, voice and wireless services to businesses and households while hosting cloud capabilities and information technology services. CTL also provides network and data systems management, data analytics and IT consulting and operates over 55 data centers around the globe. CTL has a 250,000-mile fiber network in the U.S. and a 300,000-mile international transport (optical, wireless and submarine cable) network.
Still, I wouldn’t care to own this stock, no matter how wonderful the dividend. CTL produces anemic revenues, foundering net profit margins, declining earnings and poor employee metrics. (Each AT&T employee produces 50 percent more in revenues than each CTL employee.) It has just a 2.1 percent return on capital, versus 8.5 percent for AT&T. And CTL shares, which traded at $49 in 2007, have steadily declined in value ever since.
The “wonderful” dividend was actually higher, $2.90 a share, in 2012. Meanwhile, there have been five times during the past seven years that CTL’s earnings couldn’t cover the dividend. So as your broker said, management took money from its substantial cash flow — which has been as high as $10.48 a share and as low as $4.61 — to make those too-generous dividend payments.
The following is a simple method for calculating cash flow. You begin with net income. Then you subtract all gains and losses that result from financing and investments, such as profits from the sales of land, patents and buildings. Then you add all noncash charges to income — such as depreciation and goodwill amortization — and subtract all noncash revenue components. The result is cash flow — and if you say “a case of cash flow” several times, you may get a dozen bottles of wine!
Though CTL’s revenues have risen tenfold since 2008 — thanks to those handoffs of landline customers from AT&T and Verizon and the 2017 acquisition of Level 3 Communications — earnings have been up and down like a teeter-totter. (There’s a mighty good Teeter-Totter cabernet sauvignon, at $70 a bottle.) And because 2019 earnings are expected to come in at $1.20 a share, this year’s $2.16 dividend will also come from cash flow, projected to be $6.15 a share this year. Wall Street figures that CTL’s earnings over the coming four years won’t be enough to cover the “wonderful” dividend. Ergo, the board may be forced to reduce the payout. Certainly, the stock’s price performance over the past few years (from $33 to $14) suggests the dividend will be lowered. And if the dividend is lowered, I think CTL’s share price will be lower. Don’t buy the stock.•
Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775 or email him at email@example.com. The opinions expressed in this column are those of the author.
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