When it comes to dividend stocks, consistent payments - and better yet, consistent raises - quarter after quarter for decades on end is the gold under the mountain. It's a rare payer, indeed, that can claim such dogged commitment.
When you find one that not only has over twenty years of uninterrupted disbursements under its belt, an average five-year growth rate of 62% and also a current yield of 7.53%, if you're looking to add income into your portfolio, your ears are bound to perk up. You may even be inclined to buy without any further investigation whatsoever.
Even in the world of dividends - steady as it may seem at times - the maxim holds brutally true: Past performance doesn't guarantee future results.
Today, I'll be going over one stock, CenturyLink Inc. (CTL), that could very well prove to be a shining example of just how true that adage is. Despite the fact that it lays claim to the compelling figures listed above, there are some serious questions regarding its future.
A Dividend House Divided
This isn't the first you've heard on CenturyLink Inc. from D&I Daily. My colleague, Louis Basenese, warned investors last month about falling into its high-yield trap. If you weren't convinced then, here's a more in-depth analysis of why Louis was right on the money, then and now.
Since 2009, this integrated U.S. telecommunications company has acquired a few other companies - Embarq, Qwest and Savvis - that have helped it grow into the third-largest phone company in the United States.
CenturyLink now provides local phone service to 15 million lines and high-speed internet access to 5.5 million customers across 37 states. It also owns and operates a national fiber-optic network that spans 210,000 miles. Its acquisition of Savvis gave the company ownership of 49 datacenters around the world.
The acquisitions of Embarq, Qwest and Savvis not only gave the company further reach, they also helped change its business profile. It now receives more revenue from enterprise and wholesale services, as opposed to residential business, something that may provide greater revenue stability.
So far so good. But what remains is the significant risk that revenue won't grow into the future.
While current revenue might be enough to continue paying the dividend - adjusting for all the recent acquisitions - it's declining 1.3% year-over-year. That trend could spell doom for its dividend program. Sources of revenue are, indeed, being slowly depleted by the rise of wireless, which is eating away at its customer base. The adoption of wireless is in all likelihood going to continue.
CenturyLink has also lost business to cable providers and will be hard-pressed to regain those customers. Additionally, the company has some sizable unfunded post-retirement benefit obligations to contend with. What's more, while the company boasts an average five-year dividend growth rate of 62%, its stock price hasn't fared as well. CenturyLink was trading at about $42 per share in December 2007. It's currently under $39.
Now, I hate to quote a 10-Q at length, but the company's most recent document is extremely telling:
The current practice of our Board of Directors to pay an annual $2.90 per common share dividend reflects an intention to distribute to our shareholders a substantial portion of our cash flow. As a result, we may not retain a sufficient amount of cash to finance a material expansion of our business in the future.
In addition, our ability to pursue any material expansion of our business, through acquisitions or increased capital spending, will depend more than it otherwise would on our ability to obtain third party financing.
We cannot assure you that such financing will be available to us at terms that are as favorable as those from which we previously benefited, at terms that are acceptable to us or at all."
Interpretation? CenturyLink has enough cash for the dividend - but at the expense of further expansion.
Therefore, if the company can't grow its revenue through its existing business, it may be forced to pursue business expansion. And in the end, it's unsure - doubtful even - that it can acquire financing at terms as favorable as in the past. Clearly, as a result, the dividend could come under direct threat, and the stock price could weaken even further.
Bottom line: Don't touch CenturyLink with a 10-foot pole. It's internally torn between expansion and paying dividends. If you own it already, the best advice is to apply a nice trailing stop-loss order to the position, while staying abreast of all developments within the company. Be ready to pull the trigger and move on to something better.