Dividend investors are always scared that a company will cut its quarterly payouts, and when it does, it can wreak havoc on share prices. CenturyLink (NYSE:CTL) shareholders faced that challenge early last year, when the telecom provider decided to reduce its dividend by more than 25%. Yet many investors feel a lot more confident about CenturyLink's long-term prospects than they do about peers Frontier Communications (NASDAQ:FTR) and Windstream Holdings (NASDAQ:WIN), and the reason is pretty simple: what CenturyLink did with the money it saved from its lower dividend could end up resulting in greater dividends down the road. With that in mind, let's take a closer look at two things every dividend investor should know about CenturyLink.
1. CenturyLink has actually been returning more capital to shareholders.
Ordinarily, a dividend cut happens because a company finds itself in a cash crunch and is unable to keep making payments. But in CenturyLink's case, its decision to reduce its dividend was accompanied by a strategic capital-allocation move to emphasize share repurchases, giving them roughly equal priority in CenturyLink's game plan to return capital to shareholders.
Investors have seen the results. On average, CenturyLink has repurchased about $350 million in shares each quarter since the first quarter of 2013, while its dividend cut only taking about $100 million to $150 million off what shareholders received in dividends every quarter over that time span. Moreover, part of the reason that total company expenditures on dividends have gone down steadily since early 2013 is that CenturyLink's overall share count has fallen over that period, and fewer shares outstanding means that those per-share dividend payments equate to less capital needed to sustain the payouts.
Of course, that could change in an instant if CenturyLink decides to go in a different strategic direction. For instance, if CenturyLink decides to look at a potential acquisition, then it could decide to spend less on buybacks in order to free up cash to finance a merger bid. For now, though, CenturyLink seems eminently comfortable with its strategy for capital allocation, and the flexibility it has arguably leaves shareholders better off than they were under a strict dividend-only policy.
2. CenturyLink has actually made some positive strides in customer service.
Customers almost universally hate their telecom providers, citing terrible customer service, high prices, poor service levels, and a lack of reliability among their chief complaints. Yet even though the industry hasn't made much progress lately in improving its bad reputation, CenturyLink recently stood out from its peers.
Earlier this year, the American Customer Satisfaction Index report on the subscription video and Internet-service-provider industry found that customer satisfaction for ISPs dropped another 3% in 2014, representing the lowest score in the broader ACSI. Because most customers don't have many alternatives to whichever provider covers their area, the companies that provide Internet service don't typically have a lot of incentive to do anything about their poor reputations.
CenturyLink wasn't at the top of the satisfaction list, as that honor went to Verizon (NYSE:VZ). But one thing CenturyLink did that none of its peers matched was that it saw its year-over-year rating improve. Considering that cable-based ISPs saw their ratings fall sharply, the trend shows that CenturyLink might actually have a competitive advantage in areas in which it's competing with established cable operators to provide premium services. Granted, getting better from such bad levels isn't necessarily all that huge an accomplishment, but it could help CenturyLink's growth efforts down the road.
CenturyLink has done a good job of explaining its past dividend cut and in making progress on the financial front. Even if customer satisfaction continues to elude the company, CenturyLink could end up making shareholders very happy indeed in the long run.
Dan Caplinger has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.