Shares of CenturyLink (CTL) are sliding following quarterly results and after the company announced it is slashing its dividend in half as it focuses on paying down outstanding debt. Last week, Citi analyst Michael Rollins downgraded the stock to Sell as he expected a 50% dividend cut.
RESULTS, DIVIDEND CUT: On Wednesday after market close, CenturyLink reported fourth quarter adjusted earnings per share of 37c and revenue $5.78B, with consensus at 32c and at $5.78B, respectively. For 2019, the company sees adjusted EBITDA between $9B-$9.2B, free cash flow of $3.1B-$3.4B, CapEx between $3.5B-$3.8B, and effective tax rate of about 25%. Additionally, CenturyLink said that the Board of Directors plans to reduce the company's annual dividend to $1.00 from $2.16, beginning with the Board's next dividend declaration.
CITI FORECASTED DIVIDEND CUT IN HALF: In a research note to investors on February 5, Citi's Rollins downgraded CenturyLink to Sell from Neutral and lowered his price target for the shares to $11 from $19. The analyst said he expected headwinds on revenue and cash flow, a possible dividend cut, and the likelihood for capex upgrades to lead to further multiple contraction. CenturyLink will face a "growing tug of war" on cash flow beginning in 2019, which will result in a dividend payout level "well above its previously articulated comfort zone," Rollins contended. At the time, the analyst said he forecasted a 50% dividend cut in 2020 for CenturyLink, and that a sum-of-parts approach was "not compelling" given that the heritage CenturyLink operations were experiencing mid-single digit revenue declines and Level 3 had not grown revenue over the last two years.
MOVING TO THE SIDELINES: Following quarterly results and dividend cut, UBS analyst Batya Levi downgraded CenturyLink to Neutral from Buy and lowered his price target on the shares to $14 from $24, as he gets more cautious on the stock's long-term revenue outlook. While the analyst acknowledged that 2019 guidance came in line with his EBITDA outlook, he noted that it was driven by incremental cost savings while revenue trends will likely remain elevated due to continued competitive and pricing pressure on Consumer/SME/Wholesale and limited improvement in Enterprise. Further, Levi argued that the company's lower dividend is a reflection of limited visibility into revenue improvement and ongoing secular pressures. Voicing a similar opinion, JPMorgan analyst Philip Cusick downgraded CenturyLink to Neutral from Overweight and lowered his price target on the shares to $14 from $27. The analyst believes the dividend cut announced on Wednesday creates questions about the company's long-term trends despite an in-line guide. The in-line numbers and guide make the dividend cut "especially frustrating" for investors as management seems more nervous on the outlook and appropriate leverage of the business despite arguing that nothing has changed, he contended. Although Cusick acknowledged that the company has ample free cash flow generation in the medium term, the analyst argued that the dividend cut and continued revenue degradation make him less confident in the business over time.
PRICE ACTION: In morning trading, shares of CenturyLink have dropped 8.3% to $13.48.
CenturyLink
-1.38 (-9.39%)