February has not been a good month for CenturyLink (CTL). Watching a dividend drop by 25% and seeing the market value of the stock melt away by a corresponding amount is never a fun thing. However, there is a time to put emotion aside, and ask what the stock has to offer going forward, rather than crying over the current events.
I am a current CenturyLink investor (yes, I did a little crying). I am also someone who has money I need to put into the market. So, I look at this situation with two different sets of glasses. As an existing investor, I am not happy, but need to assess whether my CTL investment is worth keeping. As a new investor, I need to look at the current investment and situation (obviously with some respect to what has gone before) so see if there is a compelling argument to throwing more good money at it.
The negatives of CenturyLink are well understood and have been enumerated in many recent Seeking Alpha articles. They do a significant part of business from rural traditional telco services, which is a shrinking market and they hold a lot ($20B) of debt in getting into other business. None of that is a revelation or a surprise to any investors doing their due diligence. What is getting lost in the current angst is that CTL, both as a company and a stock, still continues to have virtues. So, here is my take:
1. The company is evolving in a way that bodes well for future growth. Its traditional rural market is being replaced with higher end / higher return (internet, TV, and data center) services. If you compare the current report and presentations with priors, you can see a steady and ongoing (re)investment to reinvent the company. These are not cheap investments, but they are, by most evidence, they are being managed well and are bearing fruit. Signs point to a significant revenue inflection point from new revenue in the next 2 years.
2. The dividend, at $2.16 going forward is still compelling and more sustainable than before. New investors should see a dividend return better than other telcos, even weighted by risk. CenturyLink management has given a guideline on what to expect going forward (dividend payout of 60% of free cash flow). If you believe in their business model per item 1, their announced stock buybacks, and CenturyLink evolving positively to new growth, then this points to more positive dividend news in the future.
3. The company seems cheap. CenturyLink sells at just above book value ($31/share). This compares very favorably with their peers - AT&T (T), Verizon (VZ), Windstream (WIN). The only cheaper domestic telco out there is Frontier (FTR) at just under book value (after its own troubles) Of course, book value is sometimes a wobbly floor, as can be seen in telcos such as FTE and TI that have fallen well below book value. Other measures also seem robust. Most any stock can get cheaper, but I see the argument for CTL being cheap today.
4. The management team is mature and knows their company. While they have been demonized this last week, they are executing to a plan and are a not afraid to make changes they see necessary. When the CEO and CFO each have the 30 years of their careers invested in the company and make an unpopular financial decision based on what they argue is longer-term benefit, I am willing to give them benefit of the doubt.
So there is my argument… A currently profitable company that is evolving to a more high tech and better ROI/ROA business model, a management team that is executing to their plan, a competitive and sustainable dividend, and a very reasonable valuation. If you disagree on any of these points, then you are right to stay away from CTL. While I share some of the existing stockholder angst and anger, I think CTL is a reasonable bet going forward. I am sure there are (and looking forward to reading) counterarguments.