CenturyLink Is A Stock To Hold

May.14.14 | About: CenturyLink, Inc. (CTL)

Summary

CenturyLink’s current dividend yield is more attractive than the dividend yield of Verizon communication and AT&T.

The stock has picked up the pace and is trading at an eleven-month high price of $36.86.

CenturyLink is expanding its data centers capacity and dropping its prices to enhance its penetration in the cloud market.

CenturyLink (NYSE:CTL) reported a mixed bag of earnings for the first quarter of fiscal year 2014. CenturyLink's overall business revenues were $1.56 billion reflecting an improvement of 3.6% due to the growth in high-bandwidth offerings and data integration revenues offset by lower legacy services revenues. Data integration revenues were $35 million higher in the first quarter of 2014 compared to the first quarter of 2013. The strategic business services continued to be a key revenue driver in the first quarter of 2014 increasing 6.7% year-over-year to $655 million due to gains in MPLS and Ethernet services. However there were also a few declines. The company's business segment's margins remained under pressure and declined to 38% from 43.1% in the same quarter of prior year primarily due to higher costs related to business revenue growth such as CPE, facility and sales and marketing costs, the impact of certain favorable one-time expenses experienced in the first quarter of 2013, and the fall in legacy revenues.

Just like the earlier quarter, the consumer segment continued to follow the trend and its revenue stream was driven by broadband and prism TV subscriber additions. During the quarter CenturyLink added about 24,000 Prism TV customers increasing the penetration of more than 2 million addressable homes to nearly 10%. The company also added nearly 66,000 high-speed internet customers ending the period with more than 6 million customers.

The strategic consumer business also added good growth numbers and generated $702 million in revenues for the quarter with 8.8% growth over the first quarter of 2013. Apart from that growth the total consumer revenues remained flat at nearly $1.51 billion which reflected growth in strategic services offset by the continued decline in legacy services. In the wholesale segment the story continues to center around fiber to the tower (FTTT) services. The company ended the quarter with over 19,200 fiber-connected towers, up nearly 24 percent from the first quarter of 2013. While Ethernet-based FTTT services are its growth engine strategic revenues remained flat year-over-year at $570 million as increases in wireless carrier bandwidth demand and Ethernet sales were offset by declines in copper-based revenue.

Weak Wholesale Business Could Not Deliver Results

Unlike the other segments' performances the wholesale segment could not perform well and revenues declined 4.9% to $862 million year-over-year due to the ongoing decline in legacy revenues primarily driven by lower long distance and switched access minutes of use along with access rate reductions from implementations of the CAF Order(6). During the quarter the company extended fiber to about 395 towers but lowered the annual fiber build estimates to 2,500 to 3,000 for full-year 2014 due to customer decisions to defer certain sites into 2015.

From an overall revenue standpoint, CenturyLink reported revenues of $4.11 billion nearly flat year-over-year compared with a 2% year-over-year decline in the first quarter of 2013. Looking towards the second quarter CenturyLink's forecasted revenues and operating cash flow will be impacted by lower data integration revenue and ongoing legacy revenue declines. The company expects to report operating revenues of $4.48 billion to $4.53 billion and core revenues of $4.07 billion to $4.12 billion. CenturyLink also expects a strong sales momentum going into the second quarter and early success with its new managed office solutions as well as the continued strength in multi-site MPLS sakes.

CenturyLink Is Trying To Take a Big Slice of the Cloud Market

CenturyLink jumped into the cloud market with the acquisition of Savvis Inc., a provider of global cloud infrastructure and hosted IT solutions. Savvis is the backbone of another phase of CenturyLink's business, CenturyLink Technology Solutions, which provides managed and hosted services for government and enterprises. In 2013 CenturyLink continued to strengthen its cloud portfolio with the acquisition of AppFog, a Portland-based platform-as-a-service used by more than 100,000 developers to automate the deployment of software on public clouds such as Amazon web services (NASDAQ:AMZN) and OpenStack. CenturyLink also acquired Tier 3, a Seattle-based infrastructure-as-a-service, platform and advanced cloud management company.

Through these acquisitions CenturyLink joined big technology giants like Amazon, Google (NASDAQ:GOOG) (NASDAQ:GOOGL), and Microsoft (NASDAQ:MSFT). Despite the immense growth potential in the cloud and big data market the competition is becoming intense as more and more tech companies are using their resources to succeed in this industry for the sake of their future growth. The platform-as-a-service is forecasted to reach $2.9 billion by the end of 2016.

CenturyLink is expanding the capacity of its datacenters and dropping its prices to enhance its penetration pace. CenturyLink also has an enormous network of 56 global data centers that it believes will allow the company to keep outbound pricing significantly cheaper than Amazon's web services. The company doubled its public cloud capacity with the acquisition of Tier 3 and it is seeking to remain competitive. One of Savvis' six datacenters in Santa Clara, California now includes a Tier 3 cloud node. In Washington, where Savvis also operates multiple datacenters, another has been converted for use as a Tier 3-style, CenturyLink Public Cloud Center.

With those two conversions CenturyLink now has 11 operating cloud centers and will add one in Canada and one in the United Kingdom this quarter. It will add two more in the Asia-Pacific region in the third and fourth quarters bringing its total to 15 with an additional center to be added at an undisclosed location by the end of the year. With these efforts the company could gain profitable revenues and earnings.

Conclusion

The solid point to consider about CenturyLink is its quite impressive dividend yield. Currently the company is paying $2.16 per share dividends with a 6.78% yield that is higher than the 5.05% dividend yield of AT&T (NYSE:T) and 4.37% dividend yield of Verizon (NYSE:VZ). Over the past five years CenturyLink has maintained its yield between 6.28% and 7.80% which is an indication that safe and stable dividends can be expected in the future. Year to date the stock has gone up around 16% although it may not appreciate too much during 2014. However, up until now it has performed well enough and combined with the attractive dividend yield this stock is good enough to offer investors safe returns.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: The article has been written by a Gemstone Equity Research research analyst. Gemstone Equity Research is not receiving compensation for it (other than from Seeking Alpha). Gemstone Equity Research has no business relationship with any company whose stock is mentioned in this article.