Reaching for yield is one of the dumbest things a person can do. If a dividend produces a yield that's well in excess of what's out there in the marketplace, you should be skeptical of that payout and question whether it is sustainable, rather than being opportunistic and believing you may have a real bargain on your hands.
Thus, we have the cautionary tale of CenturyLink (CTL) , the hodgepodge of a telecommunications company that last night cut its dividend, despite the fact that management had stood by it in previous presentations -- and some very good analysts believed the company would continue to support it, too.
For several years now, I have been getting calls about the safety of this behemoth dividend because it had the largest yield in the S&P 500. Notice the word "had," because last night the company cut its dividend from $2.16 down to $1.00. That is a drastic slash, because the company wants to create value in other ways that are better and more sustainable. At least that's my summary of what they said.
I am not happy about this, because I have been warning people for months that this company could not grow and compete with the big boys at the same time if it kept paying out such a high amount of its earnings to shareholders. We even did a piece in Mad Money specifically saying that you needed to sell this stock back in November, even as the company's execs consistently said that they could back the dividend without much difficulty. That was back when the stock was at $19. It's now at $12.
What did we know that the company didn't know? We knew that prudence dictated this axing, even when the company said it was being plenty prudent with the payout.
But you know what? In all my years in this business, I have never heard a management team say "you know what, if things keep getting bad we are going to take a machete to that dividend, so if you own it for that, you are going to take a real whooping."
Instead, it's more like what happened to CenturyLink, where a new CEO, Jeff Storey, former CEO of Level 3, a telco company that merged with CenturyLink, came in last May and looked at the trends over the next eight months and decided he could not support the payout.
Now I am being incredibly kind and generous to Mr. Storey and company here, because I really only care that we got you out of this one by looking away from the company.
Specifically, we fell back on rules. Here's a company that continually talked lovingly about how much earnings before income taxes depreciation and amortization, or EBITDA, it was making as a combined entity, with lots of cost takeouts that would really help the company's bottom line.
We, on the other hand, just noted the continual erosion of the top-line revenue stream, the same kind of erosion that impacted two fellow travelers in this industry: Frontier Communications (FTR) , with a stock that has gone from $125 four years ago to $2.3 now, and Windstream Holdings (WIN) , a $95 stock five years ago that is now at $3.
These two companies, which also provide voice, local long distance and a bunch of other typically wireline services, had CEOs who repeatedly assured me over the years that their dividends were safe, too. We saw the same progression in both of these two ne'er-do-wells, with the yield getting bigger and bigger not because it was being increased -- as was the case yesterday with Cisco (CSCO) -- but because the price of the stock kept plummeting, even as they told you that the yield was too high simply because the market had it wrong.
No, the market had it right. Now CenturyLink does have a better balance sheet than those two compadres and, because I am not an analyst who bought into the assurances, I actually applaud the move. I don't think this company should pay any dividend at all. It needs to find a way to grow -- and it needs that dividend money to figure out how.
Can they? I don't think so. But what matters here is that you recognize that you cannot look to the company or the analysts necessarily to get you out -- as only a handful of them, most notably MoffettNathanson, spotted the ongoing train wreck that is CenturyLink and the likelihood of a dividend cut. The outsized size alone -- and the industry -- told you all you needed to know. Never reach for a dividend when there is even a remote possibility that it will be slashed, despite any assurances from the company's management to the contrary.
