Back on the Q113 earnings report, CenturyLink, Inc. (NYSE:CTL) defied the critics by announcing that the company had already repurchased $682 million worth of stock through May 7, 2013. Remember the company had slashed the dividend back in February, 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?) Critics at the time suggested that the company would never actually repurchase shares.
The mega-cap stock plunged 26% that day, but it has since rebounded to nearly $38 from the lows below $32. The third-largest telecommunications provider in the U.S. has already provided savvy investors with a nearly 20% gain from those first-day lows not even counting dividends.
Encouraging Cash Flow Trends
CenturyLink generated free cash flow of $1.0 billion for the quarter providing the cash needed to continue funding the capital allocation plan. The company expects free cash flow for the full year to remain around $3.1 billion.
The company utilized a portion of that cash to repurchase 11.1 million shares for $386 million during Q1. The average purchase price was $34.77. Remember, the remaining 8.1 million shares were purchased during Q2 up to the point of the earnings report. The company has spent $296 million this quarter at an average price of $36.54.
If one didn't know better, it appears the company slashed the dividend knowing it would cause a massive sell-off, thereby offering it a major buying opportunity. While the market doubted the plan, the management team loaded up on stock. The goal is to only spend $2.0 billion on the buyback plan over a 2-year period. Another interesting point is that the company expected to save $460 million a year on lower dividends and now it has already spent more on the buybacks.
Strong Operating Results
Maybe the most surprising part about the Q1 earnings report was that the company solidly exceeded analyst estimates and upped full-year guidance.
CenturyLink reported earnings of $0.76 versus estimates of $0.68. It also generated $4.51 billion of operating revenues, which met the top end of previous guidance.
The full-year guidance was just as impressive with both operating cash flows and earnings guided upwards. The company now expects earnings of $2.68 at the midpoint versus $2.60 previously.
Windstream Should Be Next
As suggested back in April (see Windstream Should Slash Its Dividend Now), Windstream (NASDAQ:WIN) should immediately follow this plan. The market doesn't respect the huge 11.5% dividend and having the flexibility of buying back shares on the cheap is much more preferred. Existing investors might not like the pain, but the stock would be solidly set up for the long run with a slashed dividend. The company would not be tied into a large dividend payout and the stock buyback at favorable prices will increase the value of the stock over time.
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 continues to be set up for a run back to $41:
CenturyLink defied the market logic by immediately implementing a massive stock buyback. In only a few months, the company has bought nearly 70% of the money allocated to buybacks per year. In addition, it has spent more on buybacks this year than it saved on dividends. On top of that, investors can still purchase the stock below the levels prior to the dividend-slashing announcement. While Windstream should follow the move of this stock, it appears unlikely that such a move is in the offing. Investors should stick with CenturyLink and stay away from Windstream for now.
Disclosure: I am long CTL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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.