In December 2017, CenturyLink paid out more in dividends than it generated in free cash flow. But with its acquisition of Level 3 Communications it increased cash flow significantly.
Wall Street expected CenturyLink (combined with Level 3 Communications) to produce $2.15 billion in free cash flow in 2018. CenturyLink more than hit those expectations. Through the first three quarters of 2018, the telecommunications company generated $2.8 billion and analysts expect at least $4 billion in free cash flow for the full year (consensus estimate $4.3 billion). If these analysts are right, that gives the company a payout ratio of just 54%.
While free cash flow should spike in 2018, it’s expected to decline to $3.45 billion in 2019. However, if the company continues to pay out $2.33 billion in dividends, free cash flow still easily covers the payout to shareholders.
Should free cash flow fall again in 2020, we could be entering dangerous territory where the dividend would be in jeopardy. For now, it has a moderate risk of being cut.
The reason the risk is still moderate, even though the dividend is easily covered by cash flow, is that cash flow is forecast to drop in 2019. Falling free cash flow is always a concern.
At the moment, the 14% dividend yield is pretty save and covered by the low pay out ratio of 54%.
Sven Franssen