CenturyLink: Rewarding Shareholders Key Feature In Strengthening Bullish Case

| About: CenturyLink, Inc. (CTL)

Summary

Company adds to high dividend yield of 5.9% with aggressive share repurchases.

CTL consistently working and improving services and speed to grow broadband subscriber base.

Company’s financial risk profile will improve given its attempt to further reduce debt to equity that is already lower than peers.

I reiterate my 'bullish' stance on CenturyLink (NYSE:CTL). The company recently reported solid financial results for 1Q14. In the recent first quarter, outstanding subscriber metrics and promising total revenue growth fueled earnings growth. Moreover, in its attempt to further strengthen its balance sheet, with a debt to equity already lower than its peers, the company remains committed to lowering its debt burden in the coming quarters. In addition, the company remains committed to delivering return to its shareholders, with aggressive share buybacks and a high dividend yield of 5.9%. Based on my price target of $43 for CTL, as shown below, the stock offers potential upside of 16%.

Momentum Is Building
In the recent past, the company increased its focus on improving its broadband services, both in speed and quality, to cater to the intense competition in the telecom sector. The improved broadband, quality, and speed grew the company's broadband subscriber numbers, with 66,000 broadband subscriber additions in 1Q14. The following chart shows the broadband subscriber additions for CTL, among its competitors, Windstream (NASDAQ:WIN) and Frontier Communication (NYSE:FTR).

Source: Company's Earnings Data

Moreover, the company further strengthened its subscriber base with the successful penetration of Prism TV services in Omaha; CTL added 24,000 Prism TV subscribers in the recent quarter, bringing the total Prism subscriber number to approximately 200,000.

In the coming quarters, the opportunity to gain a market share in the legacy Qwest markets, coupled with the company's plan of expansion to all areas of Omaha by 2016, will add to CTL's strong broadband subscriber base. The following table shows the number of access line losses and broadband net additions of CTL.

1Q-13

Q2-13

3Q-13

4Q-13

1Q-14

Access Line (In 000's)

(190)

(227)

(181)

(148)

(120)

Broadband

(In 000's)

67

(8)

33

49

66

Click to enlarge

Source: Company's Quarterly Earnings Report

Total revenues for CTL came out to be $4,538, up 0.6% YoY, beating consensus estimates by 1%. Total revenues were positively affected by CPE sales, and strategic consumer and business services. Continued business demand for high-bandwidth data services, consumer demand for high-speed Internet and Prism TV services generated healthy strategic revenue growth of 5.4% YoY in the recent quarter. Also, in the coming quarters, the company's total revenues are likely to be positively affected by possible growth in Ethernet services from its fiber-to-the-tower investments and wholesale business

The following pie chart shows the contribution by strategic, legacy, data integration and other revenues to CTL's overall revenue base.

Source: Company's Quarterly Earnings Report

The following table shows the growth of strategic, legacy and total revenues for CTL.

1Q-13

2Q-13

3Q-13

4Q-13

1Q-14

Strategic Revenue

(Y-O-Y growth)

5.2%

4.1%

4.2%

5.4%

5.4%

Legacy Revenue

(Y-O-Y growth)

(8.8%)

(7.3%)

(6.4%)

(6.7%)

(6.3%)

Total Revenue

(Y-O-Y growth)

(2.1%)

(1.9%)

(1.2%)

(0.9%)

0.6%

Click to enlarge

Source: Company's Quarterly Earnings Report

Shareholder Returns and Balance Sheet
The stock offers healthy returns to its shareholders. CTL has been aggressively repurchasing shares to support its EPS growth. CTL repurchased $1.97 billion worth of common shares through May 6, 2014, under its ongoing $2 billion repurchase plan. Last quarter, the board authorized an additional $1 billion repurchase program, which is expected to start once the ongoing program ends. The share-repurchase programs undertaken will portent well for the company's EPS growth and they will magnify ROE.

Also, currently the stock offers a high dividend yield of 5.9%, with a low targeted payout ratio of 45% for 2014. Dividends offered by the company are safe and backed by its free cash flows base, as shown below in the chart.

Source: Company's Quarterly Earnings Report

CTL still stands with a relatively safer balance sheet than its peer group companies, with a debt to equity of 1.25x, which is lower than the debt to equities of WIN (2.01x) and FTR (10.36x). Moreover, the company's management assured its commitment to lowering the debt burden in coming quarters, which will further improve CTL's financial risk profile.

Price Target
I have used cost of equity of 7.5%, after tax debt cost of 4.5%, WACC of 6% and a nominal growth rate of 1.5% in my price target calculations. The stock offers a potential price appreciation of 16%, based on my price target calculations of $43.

2015

2016

2017

Terminal Value

FCF (In $-Millions)

2,204

2,052

2,119

47,795

Present Value (In $-Millions)

2,072

1,826

1,780

40,148

Click to enlarge

Source: Equity Watch Estimates and Calculations
Value of Firm = $2,072 + $1,826 + $1,780 + $40,148

= $45,826

Market Value of Debt = $21,000

Number of Shares Outstanding = 574.53

Value of Equity = $45,826 - $21,000

= $24,826

Price Target = $24,826/574.53

=$43

Conclusion

I am bullish on CTL, as the stock offers a high dividend yield of 5.9% and has been aggressively undertaking share repurchases to support EPS growth. The company has been taking the right measures by improving services and speed to grow its broadband subscriber base. Also, the decline in legacy revenues has been moderating, which will portend well for revenues in coming quarters. Moreover, CTL's financial risk profile is further likely to be improved, as it remains committed to reducing its debt to equity, which is already lower than its competitors.

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.