CenturyLink: Ignore The Dividend Yield, Buy The Growth Story

Feb.24.14 | About: CenturyLink, Inc. (CTL)

CenturyLink (NYSE:CTL) is an American communications company that provides communications and data services to residential, business, governmental, and wholesale consumers. The company recently released its fourth-quarter financial results, achieving core revenue of $4.1 billion, a year-over-year decline of 0.4%. Operating revenue fell marginally from $4.58 billion last year to $4.54 billion in the fourth quarter of 2013. The company is seeing a marginal reduction in operating expenses, but diminishing operating cash flow is a matter of concern.

Investors can look at the firm's key initiatives to innovate, differentiate, and succeed in a very competitive environment, and then decide whether it is a worthy investment.

A Look At The Reported Quarter

In the first quarter of 2014 (excluding special items), operating revenue rose from $4.46 to $4.51 billion. Core revenue also increased from $4.07 to $4.12 billion. Operating cash flows increased slightly from $1.73 to $1.78 billion. Also, adjusted diluted EPS increased from $0.58 to $0.63. The company anticipates a decline in depreciation and amortization expenses in the first quarter of 2014 due to the impact of declining amortization of acquisition-related intangible assets.

Revenue from strategic services in the consumer segment came in at $683 million in the quarter, a 7.7% increase over the fourth quarter of 2012. CenturyLink generated around $1.50 billion in total revenue from the consumer segment, a decrease of 1.7% from the fourth quarter of 2012, as a result of a continued decline in legacy services.

An increase in wireless carrier bandwidth demand and Ethernet sales, along with delays in copper-based wireless disconnects, lead to strategic revenue of $581 million in the quarter.

The data hosting segment also witnessed growth in services revenue as cross-selling initiatives continue to strengthen sales opportunities. In 2013, core revenue trends greatly improved from a 2.3% annual decline in 2012 to a 1.3% annual decline in 2013. This continued revenue improvement was driven by a nearly $400 million increase in strategic revenues, primarily due to growth in broadband, Prism TV, and high bandwidth data services and hosting services.

What Does The Future Hold?

CenturyLink has effectively executed its objectives and has made investments that it believes will lead to revenue stability.

CenturyLink's growth was driven by MPLS, Ethernet, and wavelength revenues. Additionally, the company is benefiting from the decline in legacy revenue as it focuses on newer products. CenturyLink added a record 26,000 CenturyLink Prism TV customers during the quarter, driven by growth in strategic services. In the wholesale segment, CenturyLink saw an increase of nearly 30% in fiber-connected towers to 18,800 from 2012.

The firm achieved solid growth in both high speed internet and Prism TV subscribers throughout the year, adding 14,000 HSI customers and 69,000 Prism TV subscribers. Also, it is encouraging to see a bump in Prism TV subscribers in new legacy Qwest markets where CenturyLink had lost Prism customers in 2013.

Throughout the year, CenturyLink invested to improve broadband speed availability across its markets. It grew the number of enabled access lines receiving 20 Mbps and 40 Mbps each by approximately 25% over the prior year.

Moreover, CenturyLink is focused on deploying more fiber to multitenant buildings. So, it expanded the program by approximately 1,000 buildings during the year. Excellent progress has also been achieved on its $2 billion stock repurchase program, authorized by the board in mid-February last year.

Additionally, CenturyLink expects to successfully align its operating costs with future revenue streams to continue to generate solid, predictable cash flows in the years ahead. Improving upon operational efficiency to mitigate the impact of the revenue mix shift on the operational cash flow and free cash flow over time is important for the company.

The launch of Managed Office - a user friendly, fully-managed IT services and communications network bundle for small and medium-sized business customers that comes with game-changing level of customer care, typically reserved for large enterprise business customers - could help drive adoption of this product.

Downward Risks

CenturyLink has a towering short interest of 45.22 million shares. The short interest is driven by the speculation that CenturyLink's dividend yield might drop in the future if the company decides to allocate resources to its growth initiatives.

However, speculations about the non-sustainability of CenturyLink's dividends continue. It is being said that CenturyLink might stop, or reduce, dividends on the pretext that it is investing in key strategic initiatives to grow revenue.

A Good Buy?

There might be doubt over whether CenturyLink could sustain its dividend or not, but it is evident that the company is gaining customers in key areas. The addition of new product lines in the residential consumer segment and initiatives in the business consumer market through the launch of new and enhanced features with faster surfing speeds and lower latency time at a competitive price tag puts CenturyLink in an advantageous position among its rivals.

Also, a low forward P/E of 12 suggests that the stock is cheap and it could be worth buying. A strong dividend yield is yet another reason why CenturyLink looks interesting, but it should be kept in mind that the company is also looking to benefit from opportunity in its end markets, further strengthening the bullish case.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.