Shares of CenturyLink Inc. (CTL) have been roughly flat since 2000. As of 2009 however, investors have been receiving a fairly attractive dividend yield of anywhere between 6-9%. As an integral portion of the total return over the past five years, how sustainable is the current dividend, and can investors expect any boost in the total payout?
The Business
CenturyLink is the third largest telecommunications company in the United States in terms of lines served, behind AT&T and Verizon. The company offers voice and data communications, as well as television and home security services.
The US West service territory covers 14 states, including Washington, Minnesota and New Mexico, along with such major metro areas as Seattle, Portland, Denver and Minneapolis. Its Internet services cover even more ground, with offices in New Jersey, North Carolina, Atlanta, Chicago, Florida and across Texas.
Ownership
Negatively, insiders own a surprisingly low number of shares with nothing but sales over recent years.
The company is a fairly-sized portion of some Guru’s however, with Joel Greenblatt (Trades, Portfolio) boosting his position significantly in recent months.
Growth Prospects
The company's problem is that it's losing old-line telephone customers faster than it's picking up fiber-based broadband customers. Still, strategic growth initiatives are slowing the rate of legacy revenue declines.
Century Link owns 250,000 miles of fiber lines and is committed to being the broadband leader in its respective markets. In 2014, this network helped the company grow high-bandwidth data services 16% year-over-year. They also added 91,000 high-speed Internet customers and 67,000 Prism TV customers.
CenturyLink still has a number of growth projects that they plan on implementing in the near future:
In total, these initiatives have helped slow overall revenue declines to near break-even levels.
Importantly however, many of these new services are lower margin than their legacy fixed-line business due to high up-front investment costs. So while revenues have stabilized, EPS has trended lower due to falling margins. However, once these services gain scale and initial investments roll off, the company expects positive earnings and EBITDA margin improvement.
Valuation
Although the company’s EPS decline has decelerated, consensus estimates still have earnings declining by roughly 0.5% annually for the next five years.
In regards to dividend stability however, this earnings forecast would support the current payout. Despite charges that have depressed EPS over recent quarters, analysts expect a normalized EPS level of around $2.50 a share.
At the current $2.20 dividend, this would suggest that the dividend payment would be covered over the next five years assuming consensus forecasts are in the right ballpark.
On a multiple basis, CenturyLink currently trades at a discount to its better-positioned and more diversified peers AT&T (T) and Verizon (VZ). Understandably however, AT&T and Verizon are both expected to grow EPS roughly 6% annually over the next five years, granting them a justifiable premium.
On a standalone basis, CenturyLink’s P/CF multiple (probably one of the better metrics considering the business) doesn’t look to be overly stretched compared to history.
Conclusion
Overall, it appears as if CenturyLink's investments in growth projects such as broadband and TV are paying off. Revenue declines have slowed to near breakeven levels and EBITDA margins are expected to take hold following initial investment periods. In terms of the dividend, it looks like it should be fairly safe barring any cut to accelerate the rollout of growth initiatives. From a total return perspective however, it doesn't look like investors should anticipate any capital appreciation apart from speculative multiple expansion.
For more ideas like this one, check out GuruFocus’ High Dividend Yield Stock List or the rest of R. Vanzo’s Articles.
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