Investors love their dividends, but in this environment, many companies are cutting their payouts, especially those in heavily affected industries such as travel, airlines, and oil and gas, as well as companies with high levels of debt.
However, two such companies recently reported their first-quarter results this week, with each confirming they would pay their next dividend payment. However, one company withdrew its full-year guidance, and another hinted that the dividend may be reduced or eliminated later in the year.
Nevertheless, both companies currently yield over 10%, meaning they are both screamingly cheap, even if their payouts eventually get cut, and especially in the event of a quicker-than-expected economic recovery.
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CenturyLink yields 10.1%
Wireline telecom CenturyLink (LUMN -0.76%) reported results on Wednesday, May 6. While the struggling telecom missed revenue expectations, it did beat adjusted (non-GAAP) profit expectations. Some had worried that CenturyLink's high dividend may be in trouble, especially since the company already previously cut its dividend in early 2019.
However, while the company did withdraw guidance for the rest of 2020, management said that it felt very comfortable with the current payout, which CFO Neel Dev said would still only amount in the "30s" range as a percent of full-year free cash flow.
CenturyLink's current dividend is about $1.1 billion annually, and its initial guidance had been for $3.1 billion to $3.4 billion in free cash flow for 2020. So even if the dividend payout ratio is 39% in that worst-case scenario, that would imply $2.8 billion in free cash flow.
Still, I think CenturyLink can probably attain its prior guidance. According to CEO Jeff Storey, the need for data and connectivity caused a 30% to 40% spike in internet backbone traffic as the pandemic hit, with similar spikes in usage from CenturyLink's content delivery and videoconferencing products. CenturyLink didn't see a corresponding increase in revenue, as many of its contracts operate on an unlimited data usage basis. However, it does bode well for future volumes and perhaps pricing upon renewals.
CenturyLink is currently posting slight revenue declines as legacy products, such as landline phone products, are in long-term decline; however, it also has high-speed fiber products growing underneath that. The company also outlined $800 million to $1 billion of additional synergies it can achieve after its 2017 merger with Level 3 Communications, of which it has achieved $510 million thus far.
CenturyLink said that a minority of customers are small businesses in highly affected industries, which could impact or delay revenue this year. However, the main portion of CenturyLink's internet products are recurring-revenue, essential services for large enterprises. Meanwhile, the company is cutting costs, and it's also paying down its acquisition debt in a big way. Thus, I think that juicy 10% payout should be intact despite the pandemic and that CenturyLink shares remain undervalued.
Crestwood Equity Partners yields 22%
Another high-yielder that reported this week on Tuesday, May 5, was oil and gas midstream company Crestwood Equity Partners (CEQP). Crestwood Equity partners is a master limited partnership with pipelines, storage and processing, and oil and gas marketing businesses across a diverse range of U.S. oil and gas basins, from the Permian to the Bakken to the Marcellus shale and more.
With the oil demand shock caused by the pandemic, as well as the vicious price war waged by Russia and Saudi Arabia, oil prices fell by huge amounts last quarter, and even went negative for a brief period as storage assets filled up in the U.S. Many U.S. oil and gas companies are going bankrupt, or may do so in the near future.
So how can Crestwood keep up that super-high dividend? Well, the company's dividend is well-covered for now based on free cash flow, and management even predicted a manageable EBITDA and free cash flow number for the whole year, even with the pandemic. However, management also hinted the dividend payout may be altered later in the year. Yet even if this happens, it could be a positive for long-term Crestwood unitholders.
On the conference call with analysts, management lowered its guidance for the full year, which was not a surprise. Yet the company still forecasts 3% EBITDA growth over last year, down from initial forecasts of 10% growth, due to new growth projects just coming online. What's more, management still forecasts $290 million to $340 million in distributable cash flow, which, at the midpoint of guidance, would still equal about $4.25 per unit, handily covering the $2.50 annual dividend. On the low end of guidance, management is assuming 50% of the company's oil-related assets get shut in through July, then a return to production Aug. 1.
Remember, Crestwood isn't an oil and gas producer, but rather a transporter. Natural gas hasn't seen the crash that oil has, which should leave some parts of Crestwood's revenue base intact. Meanwhile, storage is scarce, so Crestwood's storage assets should also add to revenue and cash flows this year.
And even with troubled oil customers, Crestwood has been negotiating some reduced payment terms in order to keep volumes flowing, which means getting at least partial revenue from oil pipelines and gathering volumes. Crestwood does serve the troubled Chesapeake Energy Corporation (CHKA.Q), which may file for bankruptcy soon. However, management pointed out that Chesapeake only accounts for less than 15% of the company's cash flow. Also, even if Chesapeake files for bankruptcy, its debt holders would take over, and would likely continue to pump oil through Crestwood's pipelines. Crestwood management said, "It would be very difficult for that contract to get rejected in bankruptcy."
Nevertheless, Crestwood's management said that it would evaluate its payout later in the year, while keeping the May payout intact. Management pointed to the focus on liquidity, as well as the potential to "develop a best path forward to capitalize on the value dislocations across our capital structure."
One analyst asked if that meant Crestwood would buy back some of its publicly traded debt, since Crestwood's debt trades at a discount to par value, and management confirmed that was definitely a possibility. Another possibility could actually be eschewing the dividend and buying back common units at today's discounted price.
While a cut would be painful, today's 22% yield seems to indicate that is likely to happen. But even if it does, it could be hugely accretive to long-term shareholders if Crestwood buys back its debt or stock instead in this downturn, and if things eventually return to normal. After all, management and insiders own roughly 30% of units outstanding, so they are well aligned with public unitholders.
Two high-yield stocks with outsized risk-reward
While there is no doubt a fair amount of risk investing in either CenturyLink or Crestwood, both companies offer a huge upside, and with less risk of permanent capital loss than one might think. Thus, aggressive, risk-tolerant investors may wish to give these two high-risk but high-yielding picks a look amid this pandemic.
