This week, we were asked to take a look at former Dividend Aristocrat CenturyLink (NYSE: CTL). The telecommunications industry has been in a freefall for the past decade as consumers have “hung up” on their landline telephone providers in favor of cellular and broadband.

Revenues have fallen while dividend yields have risen. Today, CenturyLink’s 6.6% yield looks appealing. But is the dividend safe?

[ad#Google Adsense 336×280-IA]Let’s find out.

CenturyLink shareholders have been treated to a rollercoaster ride over the past five years as the company has struggled to find a new growth story.

Like all telecom companies, CenturyLink’s legacy landline businesses have fallen off a cliff.

It has gotten so bad that some analysts and customers now call the company “CemeteryLink.”

Maybe calling the company “CemeteryLink” is unfair.

I wouldn’t go as far as to say the company and its business are dead. But it hasn’t been pretty.

CenturyLink’s efforts to transition into a broadband Internet and television subscription provider have taken longer than expected. It’s also required significant investment. However, investors may finally see the light at the end of the tunnel as landline customer attrition begins to slow and revenue from its new businesses picks up.

But I wouldn’t bet the farm on its dividend.

The Good, the Bad and the Unknown
First, the good news: CenturyLink’s payout ratio is much lower than that of its larger telecom peers: Verizon (NYSE: VZ) and AT&T (NYSE: T). Its 2015 and 2014 dividend-to-free-cash-flow payout ratios are 43.78% and 57.36%, respectively. This means the company is generating plenty of cash to pay the dividend… for now.

On to the bad news. The company’s free cash flow growth has been going in the wrong direction. It was down 14.74% last year and down 10.84% over the past three years. Growth in CenturyLink’s broadband and television business has not been able to keep up with attrition from the legacy landline business.

Finally, predicting future cash flow is often like answering a call from an “unknown” number. You don’t know who or what is going to be on the other end.

For that reason, I don’t believe CenturyLink’s future is as rosy as most Wall Street analysts predict. This year, analysts expect CenturyLink’s free cash flow to climb 31.01%. That’s after the company’s mixed first quarter results.

In the first quarter, revenue was lower than expected, and management guided for lower revenue and margins in the second quarter. This led one analyst to call for a “hockey stick ramp” for the second half of the year. It could happen, but I have a hard time trusting back-end loaded growth.

Regardless, the company should generate enough cash to cover the dividend.

Management’s Dividend Disconnect
Most companies cut their dividends because they have no choice. There isn’t enough cash flow or cash on the books to cover it. A dividend reduction is the worst-case scenario and management tries to avoid it at all costs – especially if the company has a long track record of returning capital to shareholders like CenturyLink did.

Unfortunately, CenturyLink management has proven it is not like most companies.

Management’s decision to hack the dividend in 2013 was not driven by a cash shortfall.

It was driven by a new “capital reallocation strategy.”

CenturyLink was still generating enough free cash flow to cover the dividend, but chose to use the money to pay off debt and buy back shares.

A dividend cut could happen again.

The company still has a lot of debt on its books.

And as the saying goes, “Fool me once, shame on you.

Fool me twice, shame on me.”

Dividend Safety Rating: D

Good investing,

Kristin

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Source: Wealthy Retirement