CenturyLink (NYSE:CTL) has been doing well since the start of the year - the stock is up over 19% year-to-date. The stock has been on an upward trend since the start of February, and the growth in the stock price has been backed by the growth in the earnings for the company. CenturyLink has been seeing increased demand for its high-bandwidth data services from its business customers, which has fueled the growth in the earnings of the company. In this article, we will try to assess the growth potential of the company and the growth in the cash flows.
Prism TV: A Growth Outlet?
High-speed internet and Prism TV were two of the major reasons for growth in earnings. The company installed 24,000 new Prism TV connections, with 66,000 new high-speed internet lines. These two may seem different services, but one is dependent on the other. In order to have a Prism TV, you also need to have high-speed internet.
Prism TV is currently covers four markets: Colorado Springs, Omaha, Highlands Ranch and Phoenix. These markets alone account for 2 million customers of Prism TV. The company is putting further efforts in this area, and by the end of this year; it expects to add 300,000 to its Prism TV client base. Compared to the connections in the first quarter, i.e. 24,000, and the quarterly average of its year-end guidance of 75,000; we can have a clear idea that the demand for Prism TV is robust.
Also, with new high-speed internet client base, more customers can opt for Prism TV. In addition, high-speed internet clients are growing at an even better rate than Prism TV, which widens the potential client base for Prism TV. By the end of the first quarter of 2014, CenturyLink had a 6 million high-speed internet client base, of which only 2 million had opted for Prism TV. This presents a huge potential market for the company to pursue.
CenturyLink has a huge infrastructure, which includes 32 global data centers. The company has achieved the economies of scale to win in the cloud market. It has slashed the prices of typical cloud VM by 60%, which alone has positioned the company to fight the competition. In addition, the company has added elements of customization and differentiation in its service and support options. The key to success in cloud market is a larger customer base and lower costs. The price cut shows that the company is able to manage the costs internally and the focus is on a wider customer base.
Free Cash Flows and Share Repurchase
Telecom companies have been under pressure due to the falling revenues from the traditional services. As a result, some of these companies have had to slash dividends - CenturyLink is one of these companies. At the start of last year, the company slashed its dividends and announced a capital plan. At the moment, CenturyLink pays $2.16 per share annual dividend, with a yield of 5.8%. Furthermore, the company continues to repurchase shares, as announced in the capital plan last year. The share repurchase plan is almost complete, as the company has repurchased 58.7 million shares through March 06, 2014 for about $1.97 billion, representing about 9.4% of the total outstanding shares. CenturyLink announced to repurchase shares worth $2 billion at the start of the last year.
The company generated $860 million in free cash flows for the first quarter - its dividend expanse per quarter stands at around $300 million, which can be easily met with the current free cash flows. The current payout ratio based on free cash flows is close to 36%, which should give ample room to the company to either grow dividends in the future or spend more internally generated funds on expansion projects.
Based on the above discussion, we believe that high-speed internet and Prism TV will drive the future growth of the company. These services are expected to continue growing at a rapid rate, and we believe these two services, along with cloud products will continue to drive the earnings growth of the company. Furthermore, the share repurchase plan is almost complete now, and the cash outlay for share repurchases will be eliminated, leaving more cash for dividends or expansion projects. We believe CenturyLink is set to grow and it is a solid long-term investment.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. IAEResearch is not a registered investment advisor or broker/dealer. This article was written by an analyst at IAEResearch and represents his/her personal opinion about the companies mentioned in the article. The article is for informational purposes only and it should not be taken as an investment advice. Investors are encouraged to conduct their own due diligence before making an investment decision. I am not receiving any compensation (other than from Seeking Alpha) for this article, and have no relationship with the companies mentioned in the article.