Is CenturyLink A Good Dividend Pick Over AT&T And Verizon?

Apr.13.14 | About: CenturyLink, Inc. (CTL)


Telecom services sector is facing challenges to generate growth.

CenturyLink's earnings growth is stagnant, but the company has potential to generate strong cash flows.

AT&T has been experiencing slow growth while Verizon has been able to generate strong growth and returns over AT&T and CenturyLink.

Slower economic growth and fierce competition are creating obstacles in the telecom service sector. Therefore, many analysts, including Moody's, have maintained a negative outlook on this sector. Over the past two years, telecom service companies have been generating slower top and bottom line growth and keep fighting with each other to capture market share. They also are spending considerable money on research and development and then on marketing campaigns to keep discovering new technologies to attract customers and gain market share. Further, they have to offer lower prices over competitors to keep their offerings attractive and valuable.

In these circumstances, even the top companies have struggled to keep their revenue growth in line as they have been doing even before two years ago. Consequently, some of them have to cut their dividends, and others are making slow or no growth. CenturyLink (NYSE:CTL) is one among them that reduced its dividends significantly, while AT&T (NYSE:T) and Verizon (NYSE:VZ), which are both well known as good stocks for dividend investors, generated only 12% and 15% growth over the past five years.

In this article, I will briefly try to point out whether CenturyLink is a good pick for dividend investors and where AT&T and Verizon stand in this line.

Is CenturyLink a Good Pick for Investors?

Amid fierce competition and changing market dynamics, CenturyLink has been making significant capital investments to pave the path for future growth. In the past three years, it has made significant acquisitions, including Embarq Corp., Savvis and Qwest. It wants to enhance its portfolio with new acquisitions. 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 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.

These acquisitions and investments in growth opportunities led the company to sustain its top line. Therefore, in 2013, it generated flat results compared with the past year, and its cash flow generating potential remained intact, which allowed it to keep investing in growth opportunities and pay dividends. Its operating cash flows are sufficiently covering its capital investments, and free cash flows are providing complete cover to dividend payments. At the end of the recent year, its operating cash flows are at $5.5 billion, capital expenditure is at $3 billion, and free cash flows are at $2.5 billion. After a dividend cut in the previous year, it paid a quarterly dividend of $0.54/share for the consecutive five quarters.

CenturyLink's free cash flows are more than double its dividend payments. At the end of this recent year, its dividend payments are only at $1.3 billion when free cash flows are at $2.5 billion. With the potential to generate massive free cash flows, it has recently initiated a buyback program of nearly $1 billion. The company is looking to fund buybacks with its free cash flows. It generated a strong and solid full-year performance and announced dividends and buybacks. Its stock gained momentum after having a selloff over the year. It is now trading at nearly $34/share, which is the highest price over the past eight months. Still, CenturyLink looks undervalued, and analysts have a targeted a price estimate of $41/share.

Where Do AT&T and Verizon Stand?

AT&T is a wireless and wireline telecommunications services company in the United States and globally. It invests heavily in growth opportunities, and it is setting footprints for future growth with its 4G LTE network. Recently, it acquired Leap Wireless for around $1.2 billion, which should bring $2.8 billion in revenues. Further, it plans to improve operational efficiencies with Project Agile. With the recent investments, it has generated 2% growth in revenues and 8.5% growth in earnings. Its cash flows are strong to cover capital investments and dividend payments but are coming down from recent years. In this year, T is expecting to generate similar growth in the top and bottom line as it did in the past year, but cash flows are expected to decrease, and free cash flows may go down over the recent year to $11 billion.

This will still cover its dividend payments, and its buyback program will allow it to make a small increase in dividends as the company did in the past year. I'm not expecting any big movement in its dividends for this year. With the modest financial performance and slow growth in dividends, its stock remains on selloff over the year and lost nearly 5.85%.

Verizon provides communications, information and entertainment products and services. Verizon is no exception. It is also making huge investments in growth opportunities. Its recent agreement with Vodafone is a step toward that direction. The company's unwavering focus on wireless, FiOS and strategic enterprise services have been generating consistent growth and have led to the delivery of double-digit earnings growth. Its Q4 results show high customer demand for Verizon Wireless, strategic enterprise services and FiOS. Verizon's long-term investments in reliable, high-quality networks are delivering value to customers and for the company. Indeed, its strategic networks are forming a strong distribution platform for future growth and innovation.

As a result of smart investments and double-digit growth in earnings, its cash flow growth remains strong in 2013. It has generated $38.8 billion in operating cash flows, representing an increase of $7.8 billion. Its free cash flows are also very large and are providing full cover to dividend payments. Last year, its free cash flows were at $21.6 billion, and dividend payments were at $5.6 billion. Verizon plans to generate similar results in 2014 as it did in the last year.

In conclusion

CenturyLink's top line growth may hinder its future cash flows. However, so far, it is in a strong position to sustain and increase its dividends with the strong cash generating potential. On top, its latest buyback program will enhance both share price and dividends. On the other hand, I believe Verizon has the strongest future prospects with its ability to generate double-digit growth in earnings and cash flows. It is in a strong position to make a massive increase in dividends.

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.