CenturyLink's (NYSE:CTL) stock has taken a huge hit after reporting that it will cut its dividend by 26%. CenturyLink reported revenue of $4.65 billion and EPS of 67 cents. The dividend decrease from 72.5 cents to 54 cents per quarter will surely upset income investors who relied on the stock for distributions.
If the company is cutting the dividend, then at least they will be able to reserve more cash on their balance sheet, right? Wrong. While the company has decided to cut its dividend, they have made a commitment to buyback $2 billion shares in two years.
I believe common sense went out the door here. The savings from reducing the dividend is 74 cents per share a year. So based on the current outstanding shares of 624 million, this means the company will save close to $462 million each year. However, the buyback will end up costing the company $1 billion a year for the next two years.
I am not sure why management believes that cutting the dividend and increasing buybacks is a sound strategy. I don't think management understands how badly this decision will impact the credibility of the company for shareholders. CenturyLink was an attractive stock because of its steady dividend increases.
CenturyLink's business is around wired telecom, which can be a drag in a world that's heavily focused around mobile. Cutting the dividend to increase FCF is one thing, but immediately initiating a large buyback plan right after is not logical.
Many investors might actually see the stock drop as a positive sign considering the dividend yield hasn't changed much. However, I believe it's best to be cautious here. Based on management's decision to reduce distributions and increase buybacks, there is no telling what they will do going forward.
This is one of the most unusual capital allocation decisions I have ever seen.
- Todd Rethemeier, analyst, Hudson Square Research