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Summary

  • Revenue trend for CenturyLink is improving, which will help in revenue stabilization in the future.
  • CenturyLink offers rich shareholder returns, including a healthy dividend yield of 6.9%.
  • CenturyLink's balance sheet remains strong.

I am bullish on CenturyLink (NYSE:CTL). The company remains a good investment option for dividend investors, as it offers an attractive dividend yield of 6.9%. Also, the growth in strategic revenues, increase in broadband subscribers and a solid balance sheet support my bullish stance on CTL. Moreover, aggressive share buybacks are likely to fuel earnings growth and portend well for the stock price.

Revenues are expected to stabilize in future
The company's legacy services revenues have dropped as off late due to secular changes and a weak economic environment. Legacy services revenues dropped by 7.4% year-on-year in 2013. Despite the fact that the legacy services revenues have been dropping in the recent past, the declining trend has improved in recent quarters, and is further expected to moderate in the future. Also, to offset the legacy revenues drop, CTL has efforts to grow its strategic revenues by expanding its broadband and Prism TV services.

The company has been relying on speed and quality improvement of its broadband services to increase its subscribers. Also, the company has increased its focus on Prism TV services to increase subscribers and counter the competition from cable operators. The company expanded its Prism TV services in Omaha and Las Vegas in the last year. CTL efforts to offset the impact of decreasing legacy revenues and address the growing competition in the industry seem to be productive, as the company managed to increase its strategic revenues by 4.7% year-on-year in 2013. The following table shows the number of subscribers for CTL's access lines and broadband services.

*(Number of subscribers is in thousands)

Q1

Q2

Q3

Q4

Access lines

1,356

13,331

13,150

13,002

Year-on-year change in access lines subscribers

-5.7%

-5.8%

-5.7%

-5.4%

Broadband

5,917

5,909

5,942

5,991

Source: Company's Quarterly Reports

I believe total revenues for the company are likely to stabilize in 2015 and thereafter due to growth in strategic revenues and moderation of the legacy services revenue drop. The following table shows the increase in strategic revenues and improving trend for legacy revenues, which support my belief that total revenues for the company are likely to stabilize in 2015 and onwards.

(Year-on-year growth)

Q12013

Q22013

Q32013

Q42013

Full Year-2013

Strategic revenue growth

4.5%

4.4%

4.4%

5.4%

4.7%

Legacy revenue

-8.3%

-7.6%

-6.6%

-6.7%

-7.3%

Total Revenue Change

-2.1%

-1.89%

-1.25%

-0.9%

-1.52%

Source: Company's Quarterly Reports

Along with its interest in stabilizing revenues, the company has plans to cut its cost and support bottom line results. The company, in the recent quarter earnings release, mentioned that it is planning to undertake an expense reduction plan, which will help the company lower its expenses from Q12014's expected levels into Q2, Q3 and Q4 of 2014. Consistent with the company's cost reduction plan, the company guided that margins are expected to improve from 39.1% in Q12014 to 39.7% for the full year, 2014. CTL plans to introduce multiple technologies and penetrate into new areas to grow revenues and earnings. Revenue stabilizing strategies and cost control efforts will portend well for the company's future earnings. Analysts are also expecting the company's earnings to grow in the future.

Source: Nasdaq.com

Relatively Stronger Balance Sheet
The company has a relatively stronger balance sheet in comparison to its peers. CTL has a debt to equity of 120%, in contrast to Frontier Communications' (NASDAQ:FTR) debt to equity of 200% and Windstream Holdings' (NASDAQ:WIN) debt to equity of 1030%. Also, CTL has a better interest coverage of 2.1x, compared to FTR's and WIN's interest coverage of 1.65x and 1.5x, respectively. Furthermore, credit rating agencies have assigned better credit ratings to CTL, than FTR and WIN, indicating that CTL has a relatively stronger credit outlook. The following tables show debt to equity, interest coverage and credit ratings for the companies.

TOTAL DEBT TO EQUITY

INTEREST COVERAGE

CTL

120%

2.1X

FTR

200%

1.65X

WIN

1030%

1.5X

Source: Reuters

CTL

FTR

WIN

MOODY'S

Ba1

Ba2

-

S&P

BB

BB-

BB-

FITCH

BB+

BB

BB

Source: Form 10-K

Also, the company does not have any significant long-term debt maturity in the coming years, which indicates a healthy credit outlook for the company.

Source: Form - 10K

Healthy Shareholder Return
CTL has always been a shareholder-friendly company when it comes to offering cash returns. The company currently offers a healthy dividend yield of 6.9%. Recently, CTL indicated that it will maintain its dividends at current levels, despite the weakness in the legacy services revenues. Dividends offered by the company are safe, as they are backed by strong free cash flows. The company had a dividend payout ratio of 52% in 2013. CTL's dividend payout ratio of 52% remains better than WIN's dividend payout ratio of 87%. The company paid $1.3 billion to shareholders through dividends in 2013. Based on last year's total annual dividends of $1.3 billion and CTL's free cash flow midpoint guidance of $2.7 billion for 2014, the dividend payout ratio is expected to fall to 48.15% in 2014.

Other than a healthy dividend yield, the company has been undertaking an aggressive share buyback program. In 2013, the company spent $1.57 billion in share buybacks, representing approximately 8% of its current market capitalization. Through February 11, 2014, CTL repurchased $1.72 billion worth of common stock, under its ongoing $2 billion share buyback program. As the ongoing share buyback program is set to expire in 2Q2014, the company recently introduced another $1 billion share buyback program. The aggressive buybacks will boost CTL's ROE and portend well for the stock price.

*(DIVIDEND PAYOUT RATIO= ANNUAL DIVIDEND/FREE CASH FLOWS)

CTL

WIN

FTR

DIVIDEND YIELD

6.90%

12.30%

8.1%

DIVIDEND PAYOUT RATIO*

52%

87%

49%

Source: Yahoo Finance, Companies Reports and Calculations

Conclusion
I believe CTL remains a good investment option for dividend investors as the company offers a healthy dividend yield of 6.9%. Also, the company's efforts to stabilize total revenues remains on track as strategic revenues continue to grow and the trend for legacy revenues is also improving. The improvement in strategic and legacy revenues trend indicates that revenues for the company will stabilize in the near future. Also, the company has a lower debt to equity, higher interest coverage and better credit ratings in comparison to its peers, as shown above, reflecting that CTL has a stronger balance sheet. Due to the abovementioned factors, I am bullish on the stock.

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.

Source: Expected Stability In Revenues Key Factor In Bullish Thesis On CenturyLink