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The big dividend cut by CenturyLink (CTL) came as a surprise to some shareholders, but my previous research indicated that investors remain focused on free cash flows and EBITDA margins. Whether or not the company uses the cash flows to pay dividends or reduce debt shouldn’t reflect on the stock as the value is in the ability to generate cash on a consistent and hopefully growing basis. Any stock weakness from cutting the dividend and maintaining cash flow targets provides a better entry point in the stock.
Image Source: CenturyLink website
Only last week, Citibank argued that CenturyLink would slash the dividend. Analyst Michael Rollins slapped a $ 11 price target on the stock making a bearish case around more capital spending and a focus on revenue growth issues.
The negative analyst call was odd considering the telecom had beaten estimates since the new CEO took over to the point that the dividend wasn’t really at question. Regardless, it appears that some investors evidently knew that a cut was on the way or were just wanting to push the stock down so far that the company would cut the dividend.
Along with the Q4’18 earnings report, the Board of Directors made the move to cut the dividend to $ 1.00, down from $ 2.16 per share. With the dividend up around 15% and so many analyst questions about the sustainability, a dividend cut wasn’t a huge bombshell.
The likely shock to the investor community is that CenturyLink is having any financial problems that would require a dividend cut. According to CEO Jeff Storey on the Q4’18 earnings call, the move was made purely to de-lever the balance sheet quicker:
However as you saw, we announced today that we plan to reduce the annual dividend to $ 1 from the current $ 2.16 per share beginning with the next dividend declaration. This decision is not based upon any concern for the outlook of our business. Our business fundamentals are strong and we believe our free cash flow could sustain the dividend at the prior level through 2019 and beyond. As I said, this change in policy isn’t about a diminished view of our business; it is driven by our view that the long-term interest of shareholders are best served by proactively accelerating, de-levering to a new lower target range of 2.75 to 3.25 times net debt-to-adjusted EBITDA.
Despite these facts, the stock is down over 40% in the last 6 months while the S&P 500 is only slightly down.
In fact, CEO Storey actually hinted at interest rate hike fears as the real reason for slashing the dividend payout to reduce leverage:
By reallocating more of our capital to leverage reduction, we believe, we will improve our cost of capital, return a significant amount of cash to shareholders at a very sustainable payout ratio, and provide additional flexibility to respond to market opportunities and any potential interest rate challenges that may occur. This is not something we did lightly but it is something we firmly believe is in the best long-term interest of our shareholders.
It sure sounds like the FED hiking interest rates in 2018 and the prospects of more hikes in the future caused CenturyLink to reconsider the acceptable leverage ratio.
About Those Cash Flows
A big key to understanding the story here is to look at the FCF progression in 2018. CenturyLink originally guided to FCFs of $ 3.15 to $ 3.35 billion for the year.
Source: CenturyLink Q4’17 presentation
The company ended up hitting an incredible $ 4.25 billion of FCF for the year. Due to a tax refund and other items that amounted to a $ 500 million bonus in 2018 that won’t repeat this year, the company was clear that the improved cash flows weren’t sustainable in 2019
Regardless, the guidance for 2019 has FCF at $ 3.10 to $ 3.40 billion. The most important detail is the capital expenditure guidance.
Source: CenturyLink Q4’18 presentation
A big key here is the capital expenditures of $ 3.50 to $ 3.80 billion or roughly 16% of revenues. The company has guided to a long-term target of ~16% of revenues, but CenturyLink didn’t hit those targets in 2018 with capex of only $ 3.175 billion.
In essence, the 2019 plan includes an ~$ 500 million boost to capital expenditures in comparison to some of the under spending in 2018. Clearly, the company could further boost cash flows by constraining capex, but the best idea is for CenturyLink to reestablish a higher level of capital spending.
The end result is solid capex spending and a dividend payout of only $ 1.075 billion with a payout ratio in the 30% range on FCFs of $ 3.25 billion. In addition, the leverage ratio was already improved by $ 1.7 billion in debt repayments in 2018 due in part to the extra FCFs last year. The goal of reaching a leverage ratio of 2.75x in ~3 years is another positive sign for the stock.
The key investor takeaway is that all of the numbers indicate the dividend cut was indeed due to a focus on reducing leverage and improving the capital structure. No indication exists that the cut was due to financial problems out into the future, therefore, the stock is appealing down below $ 13 with a dividend yield that still sits over 7.5%.
Investors shouldn’t make the mistake of heading to the bomb shelter like with typical dividend cuts.
Disclaimer: 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.
Disclosure: I am/we are 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.
Absurdly Driven looks at the world of business with a skeptical eye and a firmly rooted tongue in cheek.
As the year begins to stagger to a close, you start to look around you, hoping that you’re still acceptable to the world.
Sometimes, it’s hard to know.
You’ve been working so hard. You’re been manically pursuing goals you wrote on a napkin in a particularly seedy bar.
And you still don’t remember how you got home from that bar.
Could it be, though, that those you work with think you’ve lost it?
Well, here’s a simple test. If you know — and use — the following five words, you’re still au fait with the world’s direction.
If not, woe is you.
We’ll start with one that surely everyone knows: Floss.
Ah, but wait. This isn’t the meaning associated with slipping a piece of string between your teeth.
Instead, it’s a little dance that people perform if they want to look especially silly.
You performed it in that seedy bar, didn’t you? That’s a relief.
Alright, let’s move on to VAR.
Yes, it’s easy to get your acronyms in a twist. VAR doesn’t stand for Variable Accounting Regimen. Nor is it Vineyard Arrest Record.
Instead — surely you knew this — it’s Video Assistant Referee, the device that tries to help soccer referees make the correct decision and still manages to occasionally fail.
You must know Gammon.
No, it’s not something to do with meat. Some might say, however, that it’s something to do with meatheadedness.
For the Collins definition is: “A person, typically male, middle-aged, and white, with reactionary views, especially one who supports the withdrawal of Britain from the European Union.”
Oh, you didn’t know? How reactionary of you.
Then there’s the most difficult of these words: Plogging.
No, I’d never heard of it either. It’s apparently the practice of jogging while picking up litter. Or picking up little while jogging.
But doesn’t stopping to pick up litter defeat the cumulative aerobic effects of jogging?
I’m plogged if I know.
Finally — and the winner in Collins’ great race — is Single-Use.
Surely everyone knows and uses this. Well, at least once.
Single-Use describes the greatest scourge of our times, I’m told.
These are products that made to be used once and then thrown away. Yes, like T-shirts from H&M.
Please don’t let that happen to you.
If you aren’t familiar with these five words, you, too, could be a one-year wonder, there to be thrown away by capricious rivals or recalcitrant employees.
That might turn you into a Gammon.
None of us are supposed to be static beings. We’re supposed to learn, to sweeten like wine over time into something better than we were yesterday. We constantly laud that idea. When we finally go to practice self-improvement, though, something quirky happens–people who once promised their support withdraw to the background or seem grumpier than a woodchuck with a toothache.
Why does this happen? Research led by Lydia Emery from Northwestern University might offer a clue, as summarized by Ashley Lyles in Psychology Today. Over several studies, individuals thought about how their partners had changed. They indicated how much previous or anticipated support or resistance they had to those changes. Researchers had the individuals self-assess how clear they were about their self-concept, as well.
The researchers found that, when people had lower clarity about their self-concept, they generally were not as supportive of their partner changing. The team concluded that this was because the individuals worried that changes in their partner meant they would have to change, too. Without a solid idea of who they were on their own, they were unsettled not knowing how the partners would redefine them.
While this work focused on more intimate, romantic relationships, it’s reasonable to believe that the same results could happen with anybody we feel deeply connected to. This includes family members who help with entrepreneurial efforts, mentors or team members you’ve bonded with. It’s human nature to cling to familiarity to some degree, and because we use external validation to form and confirm our perception of ourselves, it can be scary to see those we see as our foundation become willing to shift. We have to face the question of whether the changes we see somehow will alter our future or, worse, break the connection with the person who means so much to us.
So it’s not that people don’t care about what you want to do. In fact, they probably really want you to achieve and reach your goals. It’s just that they need to know who they are without you. You can help them figure that out by
- Encouraging them to try new things
- Asking for their opinion
- Inquiring about what they want or value
- Getting them more information or resources to explore their hobbies and interests
- Tactfully pointing out both strengths and weaknesses in a positive way
- Connecting them with new people
- Stepping back so they can take more control
- Encouraging them to try again after mistakes
- Taking time to listen about deeper experiences that can fuel fear and timidity
The more you build the other person up through these strategies, the more they’ll be able to stand on their own. And once that happens, you should see their support of your self-improvement go up, too.
Published on: Oct 18, 2018
Knowledge is power but much depends on how asymmetric it is: what do you know that others don’t and vice versa. Below are four strategically different levels of know-how plus some of the strategies you can use to leverage each to advantage.
The complex issue of handling asymmetric information is central to the field of game theory– a rigorous analytic discipline used widely in economics, business, strategy, political science, law and more. I’ll address here the mind-twisting problem of how much you know about what others do and don’t know, and conversely, what they know about what you do and don’t know. This may seem esoteric but we encounter such issues daily. Let’s start simple and then build up the layers of asymmetric know-how.
Level 1: Only You Know About a Misdeed. Suppose you find out that your main competitor has stolen some of your intellectual property (IP) or other assets, and is using this against you. It could be some proprietary software, a customer list, a supplier contract, wage scales, your pricing strategies, or other confidential know-how. Often the IP thieves will be within the organization, as happened to the National Security Agency and numerous companies in such fields as oil & gas, agricultural seeds, and all manner of technology. The U.S. Department of Commerce estimated that IP theft has accounted for trillions in lost value. Much of this comes from industrial espionage by outsiders as well, especially China, although many countries and rivals play this game.
Your first reaction when learning that your secrets were stolen may be to cry foul and call the lawyers. But there may be advantage in you knowing something about their misdeeds while they don’t know that you know. First, you could infringe some of their IP as payment in kind, with a soft hint that two can play this game. This may lead to tacit collaboration, a formal licensing arrangement, or conflict resolution less costly than an ugly shoot out at high noon with legal gun slingers. Also, reconciliation can build understanding, trust or even empathy. For example, when parents find out that their young child stole some of their cash, smoked pot or drank alcohol, they can jump all over the kid or gently signal awareness, in ways that allow for face saving self-correction and maturation of the child.
Level 2: The Other Party Knows You Know. Suppose, however, that your competitor finds out on its own– without you having informed them– that you know that they have violated your IP. What should you do in this symmetric knowledge situation about the violation? First, it may not be truly symmetric because the rival may not know that you know that they know. This is akin to a child knowing that his parents found out about the smoking or drinking, while still being unsure about whether they know that he knows that. For example, it could be that the maid told the child that the parents know. As before, it may be wise to keep such meta-knowledge (i.e. what each of you know about what the other knows) asymmetric since the situation may automatically correct itself. The child will either stop his misdeed or become even more devious perhaps– although he now realizes that his parents are not as clueless as he previously assumed.
Level 3: A Child Knows His Parents Know that He Knows. Suppose that the child discovers, perhaps from the maid, that his parents now know that he knows that they have uncovered his nefarious deeds. This would be embarrassing, even though some semblance of ignorance can still be feigned, since his parents have not directly confirmed this by confronting him. Perhaps the maid lied and is playing her own game to get the child to cease his infractions, concerned that the parents will blame her for not telling them. Without complicating this layer cake further, with the maid’s varying degree of knowledge and hidden agendas, it should be clear that knowledge asymmetry can happen at multiple levels.
The first is knowledge about presumed acts of behavior (such as an IP infringement). The second level concerns the parties’ awareness about what the other side knows and doesn’t know. The game theory aspects of just the two-party conflict becomes more complex at this higher strategic level. It will seldom be optimal to put all cards on the table if tactical advantage is the aim, since judicious signaling, while avoiding loss of face, may lead to better outcomes. In international negotiations about violations of trade agreements, for example, a piecemeal approach may lead to better outcomes than fully escalating the conflict with hurt egos and further recriminations.
Level 4: Full Parity – Everybody Spills the Beans. Suppose, however, that parents tell their child that they know he knows that they know; the strategic situation now will reach a different level of meta-knowledge yet. If the indirect approach mentioned in level 3 does not work, then in anything from corporate disputes to child rearing to marital infidelity, it may pay to put all cards on the table. If restricted to one single issue, such as a stolen customer list or a child smoking pot, talking it all out may–perhaps with the help of a professional counselor–be cathartic. But when multiple issues are at stake, or if there are more than two aggrieved parties, the situation may call for seasoned negotiators who know when to separate or combine issues. One problem is that you will never know for sure that everyone has shared all they know, although legal clauses with punitive damage levels may get you close.
The general advice in complex cases of conflict is to pursue principled negotiations rather than positional bargaining, as explained in Getting to Yes. Try to agree on the principles that should govern the issue to be negotiated, such as trade dispute or a salary raise, before haggling about dollars or concessions as though you are in a bazaar. For example, should the primary reference point when hiring new managers be their past salary, your own internal payment scale, or the amount an outside party is offering them? Once you agree on that in principle, the remaining negotiation will be much easier. Also remember that good negotiators spend more time understanding the other side’s hopes, fears, and context than just their own agendas, plus any knowledge asymmetries that might exist.
Video: IBM’s new tool to develop serverless applications
OK, so we’ll always need some servers.
But with the rise of virtual machines (VM)s and container technologies such as Docker, combined with DevOps and cloud orchestration to automatically manage ever-larger numbers of server applications, serverless computing is becoming real.
We’re a long, long way from the idea that you need one server to run one application.
Serverless computing refers to the concept of building and running applications that do not require server management. It describes a finer-grained deployment model where applications, bundled as one or more functions, are uploaded to a platform and then executed, scaled, and billed in response to the exact demand needed at the moment.
CNCF created the WG to “explore the intersection of cloud native and serverless technology.” The first output of the group was a summary of serverless computing projects. These include Apache OpenWhisk, AWS Lambda, Google Cloud Functions, and Azure Cloud Functions. In short, all the major public cloud players are investing in serverless architectures. The vast majority of these are using Kubernetes to orchestrate their activities.
It’s an idea that is gaining fans. In a survey at KubeCon Austin, the most recent of an international series of conferences for Kubernetes users, the CNCF found 41 percent of respondents are already using serverless technology. An additional 28 percent are planning on using it within the next 12 to 18 months. Of the respondents currently using serverless technology, 70 percent are using AWS Lambda, followed by much smaller numbers deploying with Google Cloud Functions, Apache OpenWhisk, and Azure Functions.
Why are they investing in this approach? According to the recently released CNCF WG-Serverless Whitepaper, “Serverless computing does not mean that we no longer use servers to host and run code; nor does it mean that operations engineers are no longer required.” But “consumers of serverless computing no longer need to spend time and resources on server provisioning, maintenance, updates, scaling, and capacity planning. Instead, all of these tasks and capabilities are handled by a serverless platform and are completely abstracted away from the developers and IT/operations teams. As a result, developers focus on writing their applications’ business logic. Operations engineers are able to elevate their focus to more business critical tasks.”
What this means to your executive suite is you’ll be spending less on operations and getting more productive work from your IT staff.
In practice, this approach can work in two different ways:
- Functions-as-a-Service (FaaS) typically provides event-driven computing. Developers run and manage application code with functions that are triggered by events or HTTP requests. Developers deploy small units of code to the FaaS, which are executed as needed as discrete actions, scaling without the need to manage servers or any other underlying infrastructure.
- Backend-as-a-Service (BaaS) are third-party API-based services that replace core subsets of functionality in an application. Because those APIs are provided as a service that auto-scales and operates transparently, this appears to the developer to be serverless.
By the CNCF WG’s analysis, this delivers the following benefits to developers:
- Zero Server Ops: Serverless dramatically changes the cost model of running software applications through eliminating the overhead involved in the maintenance of server resources. Without provisioning, updating, or managing server infrastructure, a company can save significant overhead costs. In addition, since a serverless FaaS or BaaS can instantly and precisely scale to handle each individual incoming request, the serverless approach automatically scales down the compute resources so that there is never idle capacity.
- No Compute Cost When Idle: One of the greatest benefits of the serverless approach from a consumer perspective is that there are no costs resulting from idle capacity. For example, serverless compute services do not charge for idle VM or containers. When there’s no work being done, there are no charges being racked up.
Even more important to the immediate bottom-line savings though, wrote Satwikeshwar Reddy, an AWS architect, is “the biggest advantage of Serverless Architecture (SA) and often over-shadowed by the operational cost savings is the developer time. More accurately, time it takes from an idea to a production ready feature.”
That all sounds grand, but does it work?
Serverless computing, while new as a broadly accepted concept, isn’t new in production. This “pay as you go” model can be traced back to 2006’s short-lived Zimki company. Later, Iron.io, with its Worker container-based distributed work-on-demand platform, enabled customers to realize profits from a serverless approach. Since then, other companies have adopted this approach successfully.
Will a serverless approach work for your company? It’s time to find out and an excellent place to start is with the CNCF white paper. And, who knows, maybe you will be able to say, “Servers? We don’t need no stinkin’ servers!” in your next IT planning meeting.
Whether you are looking to gain awareness, improve SEO, or increase sales, having great exposure can help you get there. But PR is not a band-aid for an overarching business problem–nor is it a get rich fast technique.
A great PR strategy can take many years to build. Over the years, I’ve seen many companies start their efforts, only to stop before they’ve given the program enough time to develop. I’ve heard dozens of marketers and founders explain that they quit their PR efforts after their pitch didn’t get picked up by enough outlets in the first few week. Gaining great coverage takes time, pitch optimization, and persistence.
Often times, if a brand could have taken a step back after a rejected story to tweak their angle and try again, the second story they pitch could have been widely successful. Here’s why you shouldn’t throw in the towel for your PR outreach just yet:
1. Relationships take time to build.
Imagine you are at a party. You immediately start talking about you, your business, and your news. Very quickly, many people will not want to talk with you.
The same holds true when you’re building relationships with the media. It takes time to get to know a reporter and what they are writing about and then creating relevant pitches that are helpful to them. When you build trust and rapport with reporters, they’ll be more likely to open your emails, which is the first step to gaining great coverage.
You can build a better relationship with reporters by becoming well versed with their past writings and looking for opportunities to tell them stories of interest. Take a look through their Twitter accounts and personal websites to learn more about what they’re covering and the news that is important to them.
When you reach out to a reporter for the first time, show them that you are knowledgeable about their area of coverage and that your story fits their angle. When we reach out to reporters we make sure to spend time reading their past work to ensure our pitch is the right fit for their area of expertise. It can be easy to burn a press bridge simply by not personalizing an email enough–take your time, do your research, and get to know reporters for the long term. Slow and steady wins the race.
2. SEO is a long-term game.
When you receive a press mention, you’ll likely see a spike in traffic on the day it’s published–but don’t discount the future traffic. If you are a mattress company and you get listed as “The Best Mattresses Ever Made,” you’ll benefit from both the spike and also later from people who are searching for mattresses and come across the article. Traffic from press articles should be monitored for months to come, even after publication.
An authoritative link will not only drive traffic, but will also help your website in the search engine rankings. This boost will not happen instantly. With time and relevant inbound links, you’ll see not just your referral traffic grow, but also your organic search traffic from Google.
3. Press takes commitment–and a bit of luck.
It takes a while to learn about the best way to pitch your product. Each time you pitch, you’ll learn more about what copy and message resonates with reporters.
If you’re not seeing any success, it does not mean you don’t have an interesting story. It might mean you are pitching to the wrong reporters, your email subject line needs work, or you simply didn’t follow up.
By tracking your emails with a tool like SideKick or Yesware, you’ll be better able to see who is opening your mails, what they’re clicking on, and how many times they went back to the email. You can use this data to refine your pitch the next time. With the media always changing, it also takes a bit of luck to pitch at the right time to the right reporter with the right story.
Pitching takes a strong backbone and you’ll get a lot of rejections. If you haven’t had success yet, keep trying. And if you’ve been pitching for months with still no results, it might be time to call in a PR pro to help you optimize your pitch and press kit.
If you’re looking to reap the benefits of the press, start early, optimize often, and plan your strategy for the long haul. This time next year, you’ll be glad you stuck with it.