Considering stalled growth in the telecommunications sector, investors continue to question the valuation proposition of the traditional local providers such as CenturyLink (NYSE:CTL). Though the company has shown stable revenue growth of late, it has to constantly spend to upgrade services to grow high-speed Internet customers in order to offset declining local access lines. At the end of the day, the company has little to no growth, yet it generates billions in free cash flow, or FCF, each year. The situation leaves a conundrum for investors that fear the worst in the market.
After recently smashing Q413 earnings results, the company provided more tepid guidance for 2014 that didn't sit well with investors. The third largest telecommunications provider in the U.S. has recently rebounded after plunging to near three year lows. Nearly a year after slashing the dividend for a massive buyback program, the stock sits virtually at the same level as the days after causing a panic in the stock.
While the guidance was a little light from expectations it continues a pattern of solid, flattish growth for the company. At the same time, CenturyLink is using the high levels of cash flow to benefit existing investors by reducing the share float. The stock continues to appear attractive at these levels based on the following numbers.
As an example of the resilience of CenturyLink, the company reported Q413 earnings of $0.68 that surpassed the $0.67 earned last year. While core revenues declined 0.4% to $4.1 billion, strategic revenues grew 5.4% from Q412.
The company continues to gain momentum by adding 49K broadband and a record 26K Prism TV subscribers during Q4. The following slide from the earnings presentation highlights the progress made with Prism:
Capital Allocation Strategy
That capital allocation strategy that began roughly a year ago (see Did CenturyLink Just Become A Gold Mine To New Investors? for more details) continues to provide for significant repurchases of shares. During Q4 alone, CenturyLink bought 10.5 million shares for $331 million. Through February 11, the company has repurchased 50.8 million shares for approximately $1.72 billion since inception of the plan. The total represents 8.2% of the shares outstanding as of December 31, 2012.
The $1.72 billion repurchased now amounts to nearly 10% of the market cap providing for a huge net payout yield when adding in the 7% dividend yield. In fact, the stock ranked second in the recent top net payout yields report for stocks with a market cap above $10 billion. Investors should read that article for more details on the net payout yields concept.
The below chart showcases the progress the different yields made over the last couple of years. It highlights how the company is returning significantly more yield to shareholders.
(click to enlarge)
CTL Net Common Payout Yield (TTM) data by YCharts
Free Cash Flow
With the company guiding towards FCF of only $2.7 billion in 2014, investors were likely disappointed that the level dropped from the $3.1 billion last year. One consolation is the reduced share count leading to a nearly equal FCF per share for the year.
While the operating cash flow remains steady, the company continues to spend more on capital expenditures leading to the lower FCF. The biggest question going forward is whether those capital expenditures will lead to higher cash flows in the future or if the higher spending is needed to maintain the business. So far the later appears to be the case.
CenturyLink continues to make enough progress on modern, high-speed services to suggest strong cash flow will extend into the future. With the stock trading at levels equal to 2.5x operating cash flow and 6.7x FCF it continues to offer an interesting investment. The best indicator of the ultimate value is the extremely high 15% net payout yield. Investors should continue to buy this stock on any dips.