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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.
SAN FRANCISCO (Reuters) – Meal delivery service DoorDash Inc has hired Uber Technologies Inc’s head of finance to be its chief financial officer, which could put the startup closer to an initial public offering and deals another executive loss to Uber.
Tony Xu, CEO and Co-founder of DoorDash, speaks at the TechCrunch Disrupt event in Brooklyn borough of New York, U.S., May 11, 2016. REUTERS/Brendan McDermid –
Before Uber, Prabir Adarkar, the new Doordash CFO, worked on deals at Goldman Sachs (GS.N), a bank that frequently leads IPOs for Silicon Valley technology companies.
Tony Xu, co-founder and chief executive officer of DoorDash, said on Thursday that he selected Adarkar for his “sharp mind” and leadership skills.
Adarkar had been head of strategic finance for Uber since 2015, and as the most senior finance executive lead a team of more than 500 employees. His departure leaves yet another vacancy for the ride-services company, which has been without a chief financial officer for three years.
In a statement, Uber CEO Dara Khosrowshahi praised Adarkar for “improving financial controls to putting the company on a path to profitability.”
At a technology conference in Aspen, Colorado, this week, Khosrowshahi also lamented that his company’s CFO search “is taking longer than I’d like.”
“We have terrific candidates,” Khosrowshahi said at the conference, adding that he’s looking for a CFO who will stay beyond Uber’s initial public offering, planned for next year.
Reporting by Heather Somerville; Editing by Leslie Adler and Jeffrey Benkoe
SEOUL (Reuters) – South Korea’s biggest conglomerate, Samsung Group [SAGR.UL], came for fresh criticism about its ownership structure on Thursday, with the country’s antitrust chief saying it was unsustainable.
Korea Fair Trade Commission chief Kim Sang-jo took aim at the group’s circular shareholdings between companies such as Samsung C&T, Samsung Life Insurance, and Samsung Electronics.
The structure has enabled the family of Samsung heir Jay Y. Lee to retain control of the companies in the conglomerate, especially crown jewel Samsung Electronics, with minimum investments, critics have said.
“The clear fact is, the current ownership and control structure of Samsung Group, which goes from Vice Chairman Jay Y. Lee to Samsung C&T to Samsung Life Insurance to Samsung Electronics, is not sustainable,” Kim told reporters on the sidelines of a meeting with business leaders.
Samsung Group’s complex ownership structure has come for criticism earlier too, most notably from U.S. activist hedge fund Elliott Management, which proposed as a solution in 2016 that Samsung Electronics split itself into two.
Samsung Electronics rejected that proposal but accepted part of the fund’s proposals by announcing plans to cancel its existing treasury shares worth over $ 35 billion by 2018.
Fair Trade Commission’s Kim said he urges Jay Y. Lee to make a decision concerning the ownership structure, adding that Samsung Electronics Vice Chairman Yoon Boo-keun, who attended the meeting, had told him it will be considered.
A Samsung Electronics spokesman did not have an immediate comment.
Others have also questioned the group’s ownership structure recently.
The country’s top financial regulator said on Wednesday that Samsung Life Insurance must consider ways to lessen the risk of having too much of its assets concentrated in one place, including selling some or all of Samsung Life’s stake in Samsung Electronics.
“Lessening the risk of concentrated assets is key to securing financial stability, which is what we are interested in,” said Choi Jong-ku, Chairman of the Financial Services Commission.
“If there are any concerns about retaining management control (of Samsung Electronics) we are saying, look for ways to keep it while lessening the risk.”
Samsung Life Insurance is at the heart of a cross-shareholding structure in which it owns about 8 percent of Samsung Electronics, which has a market value of about $ 340 billion, according to Thomson Reuters data.
Reporting by Heekyong Yang and Yuna Park; Additional reporting and writing by Joyce Lee; Editing by Muralikumar Anantharaman
(Reuters) – Apple Inc on Wednesday appointed a new executive to oversee its Apple Music streaming business and hit 48 million subscribers, the company said.
Apple said it had appointed Oliver Schusser as vice president of Apple Music and international content. Schusser, who joined Apple 14 years ago, will report directly to Apple senior vice president Eddy Cue and will also oversee Apple’s services outside the United States, including the App Store and iTunes.
Apple’s top streaming music rival Spotify Technology SA has 71 million so-called premium subscribers, a figure that includes users who have given the company a credit card number for a free trial. Spotify became a public company earlier this month after holding a so-called direct listing on the New York Stock Exchange.
On a comparable basis, the Apple Music service has 48 million subscribers, 40 million of whom are paying subscribers and 8 million of whom are on a free trial, Apple said. Both firms charge $ 9.99 a month for streaming music but provide discounts for student and family plans.
Variety magazine earlier reported the new subscriber figures and Schusser’s promotion. He previously built up Apple’s services businesses outside the U.S. in 155 markets, including China, Japan and Latin America, Apple said.
Apple’s services business, which includes Apple Music, the App Store and iCloud, is becoming increasingly important to the Apple’s financial outlook because the smart phone market has matured and iPhone sales growth has slowed. In its most recent quarter, Apple’s services business grew 18 percent to $ 8.4 billion, missing analyst expectations of $ 8.6 billion.
(This version of the story corrects paragraph 1 to Wednesday instead of Thursday)
Reporting by Stephen Nellis; Editing by Bernadette Baum
Facebook has hired a former NBC and CNN journalist to lead its news partnerships team, a major hire as the platform deals with criticism over its role in spreading misinformation around the election.
Campbell Brown will be filling the new role, which was first posted in December. Brown previously worked as a television reporter centered on politics for NBC, later moving to CNN, where she continued to cover politics. She helped anchor CNN’s 2008 election coverage and hosted various shows. CNN and Brown parted ways in 2010.
Most recently, Brown started an education-focused non-profit focused
Brown announced the move in a Facebook post. Read more…