As investors might remember, back in mid-February CenturyLink, Inc. (CTL) did the unthinkable at the time. The company slashed the dividend in order to better allocate cash and implement a more flexible stock buyback plan (see Did CenturyLink Just Become A Gold Mine To New Investors?). The mega-cap stock plunged 26%, which is unheard of for a stock that still maintains a market cap of $22B.
As cooler heads prevailed, the third largest telecommunications provider in the U.S. has rebounded sharply from the initial lows below $32. At the current price over $35, savvy investors have already made 10% from those first day lows.
Recap Of New Capital Allocation Strategy
Before going too far let's recap what the company outlined in the revised capital allocation strategy as follows:
- Authorized the repurchase of up to an aggregate $2.0 billion of the company's outstanding common stock. The company expects to complete the program by its scheduled termination date of February 13, 2015.
- Intention to revise the company's quarterly dividend rate to $0.54 from $0.725 per share. The board expects to approve this new rate at its next regularly scheduled meeting on February 26, 2013, with the change effective with the March 2013 quarterly dividend payment.
- Expects to utilize a portion of its free cash flow generated in 2013 and 2014 to repay debt and maintain leverage at less than 3.0 times EBITDA.
The company will save around $460M on the annual dividend payments and could spend up to $1B a year on the buybacks. Investors piling into the stock since it got whacked last month will want to see the company having implemented the buyback. The current stock price is too cheap if the new allocation strategy is a legitimate move to a flexible buyback plan. Without making any purchases, the skeptical shorts will press the stock as the suggestion will be that the company announced the switch to a buyback in order to mask the dividend cut.
Highly Shorted Stock
Speaking of the shorts, DividendChannel.com posted an interesting study on Forbes highlighting the huge rise in "days to cover" short shares on CenturyLink. The company is now the 63rd most shorted S&P 500 stock based on that metric. After the dividend cut and a huge drop in the stock price, it is odd that the shares' short exploded.
Even with the recent stock gains, it still has a dividend yield of over 6% that the shorts have to fight. What is the likelihood that the company would spend the time discussing stock buybacks and anytime in the near future cut the dividend again? The answer is close to zilch.
Any average technical investor knows that when a stock creates a gap on the opening from the previous day, the gap normally gets filled. Whether the gap was up or down, the investment community typically gets overly bullish or bearish based on one piece of news causing the sudden irrational move. The gap isn't always filled, but the below chart appears set up for a run back to $41:
If the company has been able to initiate the buyback program of nearly $1B a year, it will be able to repurchase nearly 5% of the outstanding shares while still paying a 6% dividend. Even though the stock is up nearly 10% from the lows, investors still have time to buy CenturyLink on the cheap as investors made an incredibly irrational decision to unload the stock. Shifting the capital allocation plan from a dividend to a buyback is hardly a solid reason to unload a stock. New investors still get the opportunity to benefit from the illogical mindset of the investment community as the stock ought to eventually fill that gap back to $41.
Additional disclosure: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion or consult a financial advisor. Investing includes risks, including loss of principal.