CenturyLink (NYSE:CTL, news, filings) reported earnings yesterday, with revenue of $4.58B and adjusted EPS of $0.67 each just a hair beneath analyst expectations. But that’s not the story. The story is that the nation’s #3 ILEC decided that it doesn’t like issuing a dividend as much as it used to, and would like to do something else with some of that cash.
CenturyLink moved its dividend from a rate of $0.725 per share down to $0.54. In parallel they announced their intention to use the resulting free cash flow over the next two years buying back $2B of stock in the open market and repaying enough debt to move beneath the 3xEBITDA level. The new capital allocation plans are aimed at giving the company more firepower to invest in driving ‘strategic revenue growth’.
The move shocked the market, which has long seen CenturyLink as a dividend play. And you know the company’s management was aware that this might piss off many current investors. So why do it? I don’t buy the argument that they’re desperate to reduce debt at the moment, it seems like too much drama.
What do stock buybacks and debt repayments have that dividends don’t have? That’s correct, flexibility in timing when you pay for them – which means other opportunities could supercede them more easily. That says to me that CenturyLink could be setting itself up for another acquisition, which brings to mind both last October’s tw telecom rumors and my own thoughts about Softbank’s plans for Sprint Wireline.
I don’t think anything is imminent. But I suspect CenturyLink is putting itself in position to make a multi-billion-dollar inorganic move this year or next. And unlike many of their previous deals it’s going to be a cash transaction rather than a stock deal.