A stock’s yield is only as good as its cash flow because, after all, a dividend is nothing more than a promise from a company.
CenturyLink (CTL) recently reminded us of this. Its promised $0.54 per share dividend exceeded its ability to pay. The firm’s payout ratio of 130% – the percentage of profits that it was paying as dividends – was an absurd overpromise that couldn’t last forever:
CenturyLink’s Payout Promise Was Always on Borrowed Time
CEO Jeffrey Storey insisted his team remained “committed to and confident in our ability to maintain the dividend.” I understood the commitment, but questioned the confidence–taking on debt to pay dividends is a losing game.… Read more