CenturyLink (CTL) is a stock that’s been getting much attention in 2019.
For a while, it had the highest dividend yield among all S&P 500 constituents.
Even after a recent cut, it’s still paying out at 8.13%.
And we’re talking about a company that’s providing something none of us can live without… data.
Moreover, the stock is trading at far cheaper prices than its competitors and has the third-largest market share in the United States.
Should you add CTL to your portfolio for extra cash flow?
Let’s find out… by applying my MSFTs filter.
Just like electricity and plumbing, data has become essential for normal business operations and something we can’t live without in our daily lives.
This makes today’s data providers akin to utility companies… meaning they are mostly immune to recession and consumer spending habits.
Currently, economic growth is slowing. And, in times like this, companies from the defensive sectors, such as utilities, health care, and communication services, perform better than the rest of the stock market.
This should be positive news for CenturyLink.
However, the company derives three-quarters of its revenues from the business segment, making it more exposed to recessionary periods than its peers. Potential clients could decide to postpone an IT revamp, for example, until market conditions improve.
Macro Conditions: Neutral
Today’s world produces a mind-boggling amount of data.
In the last two years alone, we’ve produced 90% of it.
This statistic is worth re-reading.
And with only 3.7 billion people using the internet… and the Internet of Things ready to connect billions of devices with one another… the rate of data production is only going to increase dramatically from here.
This means data and IT providers can continue to count on steady and growing streams of revenue for years to come.
However, CenturyLink only offers fiber-rich networks.
And the emergence of new equally powerful 5G technology, something CenturyLink lacks, threatens to take the lion’s share of the data demand to other networks.
Sector Potential: Neutral
This is where prospects for CenturyLink deteriorate to zero. Its fundamentals are a mess.
While revenues are growing, the company posted a $1.73 billion loss in 2018—an amount roughly equal to the combined profits from the two previous years.
CenturyLink also increased its debt in 2017, which now represents 51% of all assets.
What’s more alarming, it can’t cover the interest payments.
The company’s interest-coverage ratio slid below 1 in Q4 of 2018. Prior to that, it was hovering around 1.5, which is still not strong enough, even for a company from a defensive sector… I look for a ratio of at least 3.
Then there’s the dividend issue.
For the longest time, CenturyLink maintained a dividend of 54 cents per share… with the CEO repeatedly claiming this was “safe. ”
Nonetheless, the management decided to reduce its dividend to only 25 cents per share… even though there exists more than sufficient free cash flow to continue paying out at 54 cents per share. It’s not a situation I am looking for as a potential shareholder.
Finally, the company is facing several class-action lawsuits for failing to report 2018 annual figures accurately. When these materialize, it will be another shock to the company’s bottom line… and stock price.
Unsurprisingly, CTL’s stock is falling.
It’s down about 50% since August 2018, and I see no signs of an end to this decline.
The last time CTL traded at prices this low was in 1995, when it was still only a telephone company and only 0.4% of the world used the internet.
As I remind you often: “Never try to catch a falling knife. ”
That’s precisely what CTL is right now.
Trigger Price: Fail
CenturyLink fails all four of my MSFTs tests.
At first glance, the 8.13% dividend yield looks like a good deal. But, given CTL’s dubious fundamentals, I think it won’t be enough to cover the price decline that undoubtedly will continue.
I recommend avoiding CTL at all costs.