Could This 10% Dividend Be Sustainable?

Centurylink Inc (NYSE:CTL) currently offers an incredible dividend yield of over 10%. Naturally the questions will come up about how sustainable this is and what the catch is. The company has a pretty strong record of paying dividends going back almost 30 years. The stock has been on a decline the past 12 months, dropping almost 30% of its value and is a big reason why the yield is as big as it is now.

Admittedly the company has struggled with its earnings per share in the trailing twelve months totalling just $0.69. Centurylink’s quarterly dividend of $0.54 per share would total $2.16 a year, or 313% of the company’s net income. A payout ratio of over 300% would certainly suggest the dividend is not sustainable, but looking at earnings is not always reliable since it includes many non-cash items that will not impact the company’s ability to pay dividends.

We could look at free cash flow to calculate the payout ratio as well. In the last fiscal year the company had free cash of $1.6 billion, of which $1.1 billion was paid out in dividends, for a payout ratio of 72%. In the last twelve months the company’s free cash has been just $422 million so there could be a problem if this recent trend prevails.

Even if a dividend cut might happen it may not be a bad idea to buy the stock anyway because if you collect even one dividend payment, at $0.54 that would yield you a quick return of 2.7%. If you hang on for a second payment you could get a payout of over 5% to hold a stock for just six months, but not without taking on the risk that the stock price drops even further.