Avoiding A Risky Stock Is Just As Important As Picking A Good One

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CenturyLink (CTL) cratered 22% yesterday after reporting weak earnings, weak revenue, a poor outlook and a cut in its dividend. A few years ago CTL bought the much larger Qwest Communications. The company has a huge debt load and for a long time popped up regularly on stocks screens and articles about dividends for its high yield which before the price drop and the coming dividend cut was about 7% compared to 5% for AT&T (T) and 4.6% for Verizon (VZ) which some clients own.

It is typical for telecom companies to carry a lot of debt but CTL has a lot of debt relative to its peers. During the day I got an email from a PR firm for the AdvisorShares Ranger Equity Bear Fund (BEAR) noting that the fund is short CTL because "We knew the company's dividend was at risk. The company did a capital lease that overstated its free cash flow. There's no way they could cover the dividend," among other reasons.


I don't follow the stock so I'll take their word for it. A point I have been making here for years is the extent to which dividend yields can be a signal of how much risk shareholders are taking and CTL is one kind of example with this.

Another more striking example is Alaska Communications (ALSK). This first popped up on my radar a few years ago after getting a favorable mention in Barron's. It had something like an 8 or 9% yield. The dividend was very steady for quite a few years without much growth then it was cut dramatically before being eliminated. The stock price was somewhat volatile trading from $8 to $16, back down again and then up to around $11 a couple of years ago and now it is under $2.

It is probably a leap to say the CTL is headed the way of ALSK but it is not a leap to have realized that CTL paid a much higher dividend and had a lot more debt than its peers and so wouldn't have taken a lot of time to decide to leave it alone.

It is important to understand the relative nature of this stuff. A 5% yield isn't crazy for a telecom company but maybe it is for something like a gold miner unless the miner is structured as an MLP (don't know if there are any gold miners that are MLPs).

The picture is of a tree tent (who knew?) and has nothing to do with the post.