“To be or not to be, that is the question”
William Shakespeare’s play Hamlet
With Monday’s FCC approval of CenturyLink’s (NYSE:CTL) acquisition of Level 3 (NASDAQ:LVLT) investor’s will be asking themselves a variant of this query; to buy or not to buy?
The major telecoms were all down significantly Monday on the news that SoftBank Group Corp. (NASDAQ:OTCPK:SFTBY) pulled its support for the Sprint (NYSE:S)–T-Mobile (NASDAQ: TMUS) merger. It seemed the tie-up was finally put to bed.
At the same time, in sharp contrast, telecommunications provider CenturyLink Inc. won U.S. antitrust approval from the Federal Communications Commission Monday for its purchase of Level 3 Communications Inc. This marriage, it seems, is going forward and this bride nor this groom will be left at the alter.
CTL now expects to close the deal this Wednesday.
CenturyLink said last year it would buy Level 3 in a deal valued at about $24 billion. It is seeking to expand its reach in the business communications market and compete with rivals such as AT&T Inc and Verizon Communications Inc.
Though we hold a decent-sized position in CTL in the Fill-The-Gap Portfolio, there are risks to initiating a position at this time, though prospects for a better future have just arrived with this anti-trust approval from the FCC and appear to balance some of that risk with reward.
- Landline subscriptions have been in a downward spiral in concert with other telcos that have lost subs to wireless.
- Even with the acquisition of Level 3 (NASDAQ: LVLT), CTL’s rivals, AT&T (NYSE:T) and Verizon (NYSE: VZ) will still have larger scale and the synergies that flow from that.
- Through various acquisitions that CenturyLink has made to stem the tide of the loss to earnings due to landline losses, the company has still, to this point, not improved its free cash flow picture in regards to the payment of dividends.
- The company did, in fact, reduce its dividend several years back and it is always possible it may do so again.
In most cases, the higher the risks the higher the rewards. This case is no different.
The company has indicated that earnings from the Level 3 merger will be accretive to the combined company’s earnings in the first year, shoring up the company’s dividend sustainability and reducing its payout ratio, making it safer.
Though many in the Seeking Alpha community have expressed grave reservations over the dividend, it now appears that the dividend is more badured, at least for the next year. If all goes well with the integration of this acquisition, investors could be surprised with a dividend increase some time next year.
The company currently pays a dividend of $2.16. At Friday’s closing price of $17.48, this translated to a dividend yield of 12.35%, more than double the 5.8% yield of rival AT&T and more than double the 4.83% yield of Verizon.
You could say that the market is recognizing the T and VZ dividends to be half as risky as that of CTL.
Diversification Has Its Rewards
You might also believe, as I do, that mixing a couple of riskier names like CTL with a greater helping of names like T and VZ constitutes a diversification within an industry that helps mitigate the risk of a dividend cut while upping the overall yield of the portfolio.
The U.S. Justice Department approved the tie-up earlier this month with some conditions. It is not immediately clear what conditions the FCC imposed.
CenturyLink, alone among the telcos, closed up a very hefty 5.21% at the close of Monday’s trade.
CenturyLink’s Position In the FTG Portfolio
We own 864 shares of CTL in the FTG Portfolio which contribute $1866 of annual income to the portfolio. Earnings from the Level 3 merger will be accretive to the combined company’s earnings in the first year, shoring up the company’s dividend sustainability.
The Fill-The-Gap Portfolio holds many positions in companies that have grown their dividends for long periods of times. Admittedly, CTL is not one of the growers, but its high dividend yield compensates quite a bit for the lack of growth. Even in recessions, even through long spans of market panic, many of our mainstays not only pay dividends but often they increase them as well. These types of stocks have a tendency to resist price contractions, more so than other types of stocks.
Consumers and businesses will always demand telecommunication services, internet connections and T.V. and cable entertainment from the likes of AT&T (NYSE:T), Verizon (NYSE:VZ) and CenturyLink (NYSE:CTL). We own all three in order to diversify our risks within the industry and benefit from the higher yield that CTL contributes.
Opportunistic investors such as myself, will always use moments of panic, uncertainty and price dislocation like these to buy panic-cheapened inventory at fire-sale prices. Because our main interest is to generate income for retirement, there is no more opportune time to do so.
Even if a large cash hoard is not available, a 21 stock portfolio such as the FTG has more than 100 separate dividend collection dates spread throughout the year. This means that new money is constantly being created and accumulated organically within the portfolio, even without the addition of new funds. It is this pool of dividends that can then be drawn upon at the best times to buy beaten down stock with elevated yield. Once-in-a-lifetime opportunities such as these, if acted upon, go a long way toward building and growing income for a future, comfortable retirement.
The Fill-The-Gap Portfolio
The FTG Portfolio contains a good helping of dividend growth stocks. In addition, it contains a sprinkling of higher yielding stocks that are not serial dividend growers but add spice to portfolio income by virtue of their much higher starting yields. It was built with the express purpose of benefiting from this and other strategies.
Two and a half years ago, I began writing a series of articles on December 24, 2014, to demonstrate the real-life construction and management of a portfolio dedicated to growing income to close a yawning gap that so many millions of seniors and near-retirees face today between their Social Security benefit and retirement expenses.
The beginning article was entitled, “This Is Not Your Father’s Retirement Plan.” This project began with $411,600 in capital that was deployed in such a way that each of the portfolio constituents yielded approximately equal amounts of yearly income.
The FTG Portfolio Constituents
Constructed beginning on 12/24/14, this portfolio now consists of 21 companies, including AT&T Inc.(NYSE:T), Altria Group, Inc. (NYSE:MO), Consolidated Edison, Inc. (NYSE:ED), Verizon Communications (NYSE:VZ), CenturyLink, Inc. (NYSE:CTL), Main Street Capital (NYSE:MAIN), Ares Capital (NASDAQ:ARCC), British American Tobacco (NYSE:BTI), Vector Group Ltd. (NYSE:VGR), EPR Properties (NYSE:EPR), Realty Income Corporation (NYSE:O), Sun Communities, Inc. (NYSE:SUI), Omega Healthcare Investors (NYSE:OHI), W.P. Carey, Inc. (NYSE:WPC), Government Properties Income Trust (NYSE:GOV), The GEO Group (NYSE:GEO), The RMR Group (NASDAQ:RMR), Southern Company (NYSE:SO), Chatham Lodging Trust (NYSE:CLDT), DineEquity (NYSE:DIN), and Iron Mountain, Inc. (NYSE:IRM).
Because we bought all of these equities at cheaper prices since the inception of the portfolio, the yield on cost that we have achieved is 7.48% since launch on December 24, 2014. Current portfolio income now totals $30,768.58, which is $588.00 more annual income than just last month. This represents a 1.95% annual income increase for the portfolio.
When added to the average couple’s Social Security benefit of $32,848.08, this $30,768.58 of additional supplemental income brings this couple annual income of $63,616.66. This far surpbades the original goal set to achieve a total of $50,000.00 which is accepted as a fairly comfortable retirement income in many parts of the country. That being said, this average couple now has the means to splurge now and then on vacation travel, dinners out, travel to see the kids and grandkids and whatever else they deem interesting.
Taken all together, this is how the FTG Portfolio generates its annual income.
FTG Annual Dividend Income
Monday, all the major indexes were closing in the red. The uncertainty of the progress of tax reform began to creep back in, as well as the generally unsettling feeling that flowed from the first indictment in the Mueller investigations.
Additional anxiety affected the telecom sector when Softbank made it know it was no longer interested in seeing the merger go through of Sprint and T-Mobile. This removed a floor of support to the entire group, except for CenturyLink, whose investors had their own good news to celebrate in its acquisition approval of Level 3.
I know I’ll get a lot of flack for this, but it must be invoked. Warren Buffett famously said, “Be fearful when others are greedy and greedy when others are fearful.” To my mind, this could not be a better definition of the moment we are faced with in CenturyLink’s latest development.
The great majority of investors will invoke memories of Kinder Morgan’s (NYSE:KMI) dividend cuts and enumerate a host of others we’re all familiar with, including CTL itself in its own past history.
I, however, prefer to see this glbad as half-full on its way to filling up to the full level.
Taking care to add high-quality names with long histories of steadily growing their dividends will help mitigate the possibility that a few equities hold theirs steady or even reduce theirs somewhat, as some investors fear with CTL.
As always, I look forward to your comments, discussion, and questions. Do you fear an investment in CTL at this time? Are you concerned whether the dividend is safe and if the dividend will be sustainable? Are you willing to feather your portfolio nest with a few higher risk names in order to juice your overall portfolio yield? Please let me know how you approach these situations in your own portfolio and how you arrive at your decisions.
Author’s note: Should you be interested in reading any of my other articles detailing various strategies to enhance your returns on a dividend growth portfolio, you will find them here.
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Disclaimer: This article is intended to provide information to interested parties. As I have no knowledge of individual investor circumstances, goals, and/or portfolio concentration or diversification, readers are expected to complete their own due diligence before purchasing any stocks mentioned or recommended.
Disclosure: I am/we are long ALL FTG PORTFOLIO STOCKS.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks badociated with these stocks.