Over the past year, many analysts, including Moody's, have maintained a negative outlook for the telecom services sector. It is expected that the telecom service companies will need to increase annual revenues at a rate of 1% to 3% in order to stabilize. Meanwhile, prices in some of the most competitive markets will continue to decline as competitors fight to increase their market share. However, the negative analyst predictions have been incorrect.
In the first quarter, the two biggest telecom companies AT&T (NYSE:T) and Verizon Communications (NYSE:VZ), reported double-digit earnings growth and predicted strong full-year earnings, and CenturyLink's (NYSE:CTL) earnings came in ahead of estimates. In this article, I will analyze CenturyLink to determine whether it is a better stock pick for dividend investors than AT&T and Verizon.
Is CenturyLink a Good Pick for Investors?
CenturyLink is successfully transforming its business to an integrated provider of IP, cloud hosting and IT services. Its strategic priorities are focused on providing hosting, cloud and IT services, business network solutions, consumer broadband and video, fiber-to-the-tower, managed hosting and TV expansion. The company is right on its business plan. It continues to make investments which include the acquisitions of Embarq Corp., Savvis and Qwest to achieve its strategic priorities. The company acquired Tier 3 to enhance its ability to deliver world class automated cloud and managed services. It partnered with IO to expand its ability to deliver flexible data center solutions.
As a result of advancing its strategic opportunities and investments, the company is well set to provide business customers with a complete suite of network services. In its first quarter earnings report, it is evident that the company's new business plan is working. CenturyLink reported $4.54 billion in revenues a 5% improvement on a year-over-year basis. It generated revenue growth because of strong demand for high-speed Internet, high-bandwidth, hosting, data services, and Prism TV services. Management's efficient implementation of its strategic priorities is turning things around for CenturyLink produced EPS of $0.66 beating analyst estimates of $0.61.
Top and bottom line growth enhanced CenturyLink's cash generating potential. It generated $1.79 billion in operating and $860 million in free cash flows. The company's quarterly dividend of $0.56 per share looks completely safe to me. In addition, I believe that the company has the option of increasing its dividend. It has made nearly $2 billion in stock buybacks and has plans to buyback $1 billion more. Share repurchases dramatically reduced its dividend payments as buybacks decreased its annual dividend payments by $125 million. Also, CenturyLink's free cash flow is twice what its dividend payments are, and the company's initiative to buyback $1 billion more in shares will create even more of a gap between free cash flow and dividend payments.
Where Do AT&T and Verizon Stand?
AT&T is among the companies that dramatically turned things around. It transformed its legacy services to an all-IP platform and further supported its transmission with initiatives like Project VIP. Its other initiatives like domain 2.0 are also working. It also plans to enter into 21 new markets with its ultra-fast fiber networks which will deliver U-verse with GigaPower and result in record wireline revenue growth.
Its moves in the wireless segment like the acquisition of leap and changing its subsidy model helped it to generate record postpaid earnings growth. With the successful transformation and recent investments, AT&T generated a record 3.6% top line growth in the past quarter, while the bottom line growth was even higher at 10.9%. Despite the earnings growth, its free cash flow does not offer room for a dividend increase. In the first quarter, the company reported $3 billion in free cash flows and made $2.4 billion in dividend payments. I expect that the company will continue its current dividend growth.
Verizon has generated high double digit growth in earnings over the past few quarters and is set to maintain that growth in the coming quarters. Its focus on wireless, FiOS and strategic enterprise services has led to double-digit earnings growth. Verizon's long-term investments in reliable, high-quality networks are delivering value to customers. Its strategic networks are forming a strong distribution platform for future growth and innovation. It is now integrating Vodafone's (NASDAQ:VOD) earnings and that will result in a significant increase in its revenues and cash flows. Thus, it is in a good position to make significant increases in its dividend. Its cash generating potential will also enable it to that. In the first quarter, its free cash flow was $2.7 billion, and its dividend payment was $1.5 billion. As a result of the Vodafone integration, the company will have an even higher free cash flow which will allow it to boost its dividends.
CenturyLink's top line growth is not as strong as AT&T and Verizon's, but the company's cash potential and focus on stock buybacks will allow it to increase its dividends. On the other hand, AT&T and Verizon are generating double digit growth in earnings. Verizon has established strong businesses and should be able to sustain high double digit earnings growth; thus I believe that Verizon is the best stock pick for dividend investors.
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.