CenturyLink (NYSE:CTL) again demonstrated its cash generating potential by declaring a regular quarterly dividend and announcing a buyback program of $1 billion. On the 24th of February, the company declared a regular quarterly cash dividend of $0.54 per share, payable on March 21, 2014 to its shareholders. After a dividend cut in the previous year, this represents its fifth quarterly dividend of $0.54 per share. On top of this, CenturyLink also announced a massive buyback of approximately $1 billion over the next 24 months. This new buyback will take effect immediately upon completion of its current repurchase program, which the company expects to complete during the second quarter of 2014. The company is looking to fund the buyback primarily with free cash flow generated.
The new $1 billion repurchase program demonstrates CenturyLink's commitment to return a significant amount of its cash to its shareholders. Its strong free cash flow and solid balance sheet allows it to repurchase shares that will grow both earnings and free cash flow per share. As a result of this announcement, the stock is back on momentum after losing a huge value over year. At the time of writing, the stock is trading at around $31 per share. As such, CenturyLink looks undervalued; as the analysts have a fair value target of $41 per share for this company.
Aggressive Investments in Growth Opportunities
CenturyLink has made significant acquisitions over the past three years, including the acquisition of Embarq Corporation, Savvis, and Qwest. The company continues to strengthen and enhance its product and services portfolio through acquisitions and new product innovations. Its recent acquisition of Tier 3 enhances its ability to deliver world class automated cloud and managed services. Furthermore, the recently announced strategic partnership with IO expands its colocation footprints and strengthens its ability to deliver flexible data center solutions. CenturyLink also continues to strategically expand its PrismTM TV footprint and enhance its broadband speeds to deliver highly competitive video and high-speed Internet solutions.
With these acquisitions, CenturyLink has become the third largest telecommunications company in the United States and is recognized as a leader in the network services market. This company is now a global leader in cloud infrastructure and hosted IT solutions for enterprise customers. The investments in its key initiatives continue to strengthen the ability to innovate, differentiate, and be successful in a very competitive market.
Ability to Sustain Dividends
While the company has reduced the dividend in order to support growth in the last year, its dividend of $0.52 per share, yielding at 6.93%, is among the best dividends in the industry and in the stock market as a whole. CenturyLink has ability to pay uninterrupted dividends while still investing in growth opportunities and working on the buybacks. In 2013, the company generated a flat top line while the bottom line was at $2.76 per share compared with $2.67 per share, excluding certain items. Further, it is expected to generate flat results in 2014.
However, its cash generating potential will remain strong as the company is anticipating generating approximately $7.25 billion in operating cash flow while looking to invest 3 billion in growth opportunities. As such, its dividends looks completely safe to me, as the company's operating and free cash flow are providing complete coverage to dividend payments. In the last year, it generated free cash flow of $2.7 billion, while its dividend payments were only $1.3 billion. This room allows the company to strongly work on buybacks. The company is expecting to generate $2.8 billion in free cash flows which offers a complete coverage to its dividend payments.
CenturyLink's latest buy back can impact its shares price and dividend in a favorable way over the next two years. As such, the company is in a strong position to achieve its financial goals. As the company is well set to generate steady growth in this current year, it will likely post better results in the following years with its aggressive investment strategy. Its dividends look completely safe with an ability to generate massive cash flow.