One way to measure the safety of the dividend is to look at revenue at risk.
Revenue segments at risk and TTM (trailing twelve month) totals ending at 2Q20 in millions:
· Medium & Small Business: 2643
Total Revenue at risk: 8,272
Revenue segments not at risk to complete the picture and TTM totals in millions:
Total Revenue not at risk: 12,049
My view is overall revenue will decline for years and so far, it has been dragging down gross margins (dollars). The revenue at risk is not going to zero but it could take a substantial hit over time. My analysis shows if total revenue stays above 19 billion the dividend should be safe. If management sees revenue falling below this the dividend could be in jeopardy (They will know the trend long before investors). Why safe with this amount of revenue loss? Because the drop in interest payments and cost savings could offset declining gross margins.
Below 19B and things could start to head lower like FCF and EBIDTA. Below 18B and the dividend will most likely be cut or eliminated IMO. I know some are thinking preposterous this could never happen but back in 2016 when the deal was announced combined revenue was approaching 25B. If someone said (back in 2016) that 2020 revenue would fall by 4B would anyone have believed it and its not just cutting unprofitable revenue (which was a good thing) since gross margins have dropped substantially but at a lower rate than revenue which I’ll say is due to the elimination of unprofitable revenue.
I feel we are through the elimination of unprofitable revenue, that could move the needle anyway. Some proof is GM$ (gross margin dollars) took a hit in Q1 when the pandemic had little affect on business. Bottom line there is a $2B cushion that may provide protection for the dividend. If that does not hold things could get ugly.
I think this argument could provide an explanation why the stock has been falling and will continue to be considered more of a speculation play than an investment ground in solid visibility on where revenue and GM$ are heading because this also leads to speculating when FCF and EBITDA will start to crumble.
What will happen? Your guess is as good as mine but the in the meantime the market is reflecting all we have to go on is speculation and not giving management any benefit of the doubt, confidence, etc.
I am betting they will turn things around; the key word being betting since I can only speculate on top line/GM$ trends based on performance. These future metrics are like the black box in an airplane, you only get to see the data when things don’t go as planned and of course it’s too late by then.
