Centurylink

[Pendrainllwyn]

I have read a number of posts which warn people off investing in shares that have dividend yields significantly greater than the market average. I agree that such a yield should be reason for caution but of course if everyone ignores it then it will leave opportunity for the brave.

I purchased Centurylink http://ir.centurylink.com/ on January 22 2018 at an all in cost of 17.31. At that time it was yielding 12.48%. I increased my position by 25% on July 20 at 19.30 and a yield of 11.19%. It closed Friday at 21.38. Of course there is plenty of time for this to go horribly wrong but at this point (taking into account the two dividends received after losing 30% witholding tax) I am up 24.1%. Not too bad in less than 7 months. Despite the good run of late the stock yields 10.10%. This is a $23.3BN market cap company not some minnow. CenturyLink was the largest holding in Longleaf Partners, a well known value investor, Partners Fund as of their last declaration as at June 30. Then (priced below 19) it was 10% of the fund. It was also the largest holding being 8.7% of their Global fund which I am also invested in. Presumably it is a higher percentage now unless they have been trimming their position.

After two very strong years my returns have been somewhat meagre in 2018. I am up a fraction. CenturyLink is one of my biggest positions but unfortunately my biggest position after two strong years is down this year which hasn't helped overall returns. So I post this to cheer myself up with at least one success whilst also hoping to provide some encouragement to those who are willing to go where others might not.

Pendrainllwyn

[Pendrainllwyn]

With Centurylink I maybe ploughing a lonely furrow. Anyway, the stock closed Friday at 23.48, up 9.8% on the week. The yield has fallen to 9.20%. Still tempting. The CFO stated when announcing their Q2 results "With our strong synergy attainment in the first half of 2018 along with our continued focus on profitable revenue growth, we are increasing our outlook for full year 2018 Adjusted EBITDA and Free Cash Flow. ... We increased our Free Cash Flow outlook to $3.60 to $3.80 billion from $3.15 to $3.35 billion." For perspective the market cap of CTL is now $25.4BN.

Mr Market seems to be growing in belief that the quarterly dividend of 54 cents per share, which has been kept constant since 2013, is secure. I continue to hold.

Pendrainllwyn

[Alaric]

Mr Market seems to be growing in belief that the quarterly dividend of 54 cents per share, which has been kept constant since 2013, is secure. I continue to hold.

With such shares, you have to do the research to establish that the dividend is being financed out of profits, rather than as some Companies have done, out of capital or creative accounting. How did it reach such a high yield? If the dividend is flat, that implies the share price may have collapsed at some time in the past.

[Pendrainllwyn]

Given this thread has captured the public imagination I thought a quick update in order
A broker downgrade didn't help sentiment and CenturyLink fell 6% Wednesday and closed Friday at 22.75 down 3.1% on the week.

Yes, Alaric, every year since 2013 (and perhaps further back) they have been paying dividends out of capital so guilty as charged. My normal preference is for companies that grow their book value per share each year so I completely agree that's a red flag. And yes the stock price has collapsed too. It peaked at 49.52 in July 2007 and fell as low as 13.84 in November 2017. Not exactly an investors favourite. We have seen a recovery or dead cat bounce (take your pick) of sorts since then.

I am not for a moment comparing CenturyLink with Amazon but I never invested in (or even looked into) Amazon because it was losing money and I didn't fully consider the enormous investments that would potentially pay off in future years. A lesson learnt. Of course many companies pay dividends out of capital when they have one off bad years however CenturyLink has been making a habit of that. So the question for me is whether this is an unsustainable bad habit or whether they have been making investments that will pay off in the future.

Firstly CenturyLink has been making significant investments in its fibre optic network and is now a leading player in the enterprise (rather than consumer) segment. Secondly they have done a large merger with Level 3 Communications. This article https://finance.yahoo.com/news/centuryl ... 00929.html states that management claims they have achieved synergy savings of $675M in just two quarters post the merger which they had previously indicated it would take 3 years to achieve. Impressive. This boosts cashflows enabling debt to be paid off earlier and presumably there are hopes that total merger synergy savings will now exceed the originally forecasted $850M.

The article concludes with "The past quarter showed the turnaround plan is ahead of schedule, and with the stock up 36% so far this year, along with a 10% dividend yield at recent prices, things are looking good for the believers." I guess I am one of those. Time will tell whether I can add this to my list of investment mistakes. I am not trying to convince anyone this is a good investment. It is helpful for me to put my thoughts down especially since this is one of my larger holdings.

Pendrainllwyn