CenturyLink (CTL) shareholders have had a tough 52-week stretch. The stock is down more than 30% from a year ago and less than 10% away from its 52-week low. Yet, despite the downward pressure, CenturyLink's dividend yield has steadily grown to more than 8%. While telecoms are known to have strong dividends, CenturyLink's yield towers above S&P 500 peers Verizon (VZ) and AT&T (T).
One interesting fact about CenturyLink that can help investors determine dividend sustainability is the fact that the company cut the dividend in early 2013. One pattern I found was that prior to the dividend cut, CenturyLink's payout ratio on a trailing 12-month basis was chronically above the 100% threshold. I believe the dividend was cut to position the payout ratio in a more manageable position. What's fascinating is that the company's dividend yield was actually lower prior to the cut vs. today.
In addition to improving the payout ratio, it was noted in the 2013 dividend cut that the company wanted to pay down debt and buy back shares. In order to maintain this strategy, CenturyLink will need to have plenty of free cash flow.
By examining free cash flow on a trailing 12-month basis against dividend obligations, investors can rest assured that the company has plenty of free cash flow to cover dividends, and an additional $1 billion to handle share buybacks and/or debt reduction.
One wrinkle to CenturyLink's outlook is in its forward earnings. Analysts are expecting the company's earnings to decline and stall over the next two years. With this projection, CenturyLink's trailing 12-month payout ratio will begin to creep toward 100%. Fortunately, the poorest performing quarter of 57 cents per share can still cover the current dividend of 54 cents per share, and hold the payout ratio in the 90%-95% during that period.
Overall, investors should be confident in CenturyLink's dividend sustainability. The company's payout ratio remains the most sensitive statistic to watch. Investors also should eye free cash flow movements and listen to management comments regarding the priority of share buybacks vs. dividend preservation.