Shares of CenturyLink (CTL) plummeted 13% in Thursday’s trading session after the telecommunication company said it would cut its dividend by more than half. While investors — who were certain the dividend would remain intact after management pledges — grew angry and fled the stock in droves, this provides an opportunity for the company to improve its financial health, including through increasing free cash flow. But some argue that financial wellbeing is meaningless if investor sentiment is negative: While free cash flow may increase, investor anger and a feeling of betrayal may haunt the company more than anything.
Nevertheless, Oppenheimer’s top analyst Timothy Horan maintains his Outperform rating on CTL stock with a $20 price target, which implies about 55% potential upside from current levels.
According to TipRanks, which measures analysts’ and bloggers’ success rate based on how their calls perform, analyst Timothy Horan has a yearly average return of 15% and a 70% success rate, and he’s ranked #47 out of 5,163 analysts.
Lost in the news for many investors was CenturyLink’s actual earnings update. The company reported revenue of $5.8B, including $2.2B EBITDA and free cash flow of $741M. Horan says that revenue is “in line” with his estimates, though both EBITDA and free cash flow came in lower than expected. Moving forward, the analyst is optimistic about the slashed dividend (from $2.16 to $1.00), which he says “will generate an incremental $1.24B in FCF in 2019.”
One challenge facing CenturyLink is in its IT & Managed Services and Voice and Collaboration segments. Hogan says that CenturyLink “continues to face pressure from cloud-based service provider competitors,” noting that these two segments “fell 14% and 7.8% y/y to $145M and $1.6B, respectively.”
Then biggest news in Hogan’s eyes is the dividend cut. He says, “the new mid-30s payout ratio should support strong capex spend (we note $1.24B in additional cash flow) as well as potential M&A activity to reinvigorate stalling legacy assets. We believe management team is cost disciplined and can expand EBITDA margins and provide another capex/FCF tailwind.” Hogan continues, saying, “while disappointing to the yield-minded investor base attracted to [CenturyLink], we believe the dividend cut was the proper move to invest in growth and pay down debt faster. The management team should execute on the additional identified cost savings and begin to ramp up capital return to shareholders in a year or so.” In other words, Hogan is optimistic that CenturyLink will make good use of the impending cash influx, even as high-yield aren’t too happy.
The Wall Street community isn’t sold on CenturyLink. TipRanks analysis of 13 analyst ratings shows a consensus Hold rating. Of the 13 analysts, four recommend Buy, six say Hold and three recommend Sell. There is an average price target of $16.17, representing a 27% rise from current levels. (See CTL’s price targets and analyst ratings on TipRanks)