The market rejoiced the that CenturyLink (NYSE:CTL) reported a blowout EPS number for Q4. The telecommunications provider had seen the stock collapse with the market despite a large dividend that was supported by cash flows.
After the big rally, CenturyLink trades above levels seen for months with the stock market at lows. The stock still offers a 7.6% dividend yield so should investors keep piling on knowing that the Federal Reserve spent the week discussing the legality of negative interest rates?
The negative story on CenturyLink has always been the lack of a wireless network would eventually lead to limited profits and cash flows. Instead, the high-speed Internet provider has constantly shifted towards new strategic services like high-bandwidth data for businesses and pay-TV for residential customers to offset legacy revenue declines.
The revenue story hasn't been pretty over the years, but the company produces large amounts of free cash flow that CenturyLink uses to return large amounts of capital to shareholders. For the full year, the company produced an incredible $2.7 billion in free cash flow. Remember that the market valuation is only at $16 billion after the recent big rally.
The value in the stock is probably best presented by this chart highlighting the net payout yield that still sits at an impressive 12.7%. The net payout yield measures the combination of the net stock buyback yield and the dividend yield. While the Fed is talking whether or not negative interest rates are good, CenturyLink offers investors a large return on their investment.
As one can see, the company repurchases shares in addition to offering a dividend yield that is still higher than the large wireless providers. Now that AT&T (NYSE:T) and Verizon (NYSE:VZ) no longer offer revenue growth as the domestic wireless market has matured, one should consider the higher yielding CenturyLink.
AT&T offers a 5.3% dividend yield and Verizon only pays 4.5%. The 7.6% yield of CenturyLink is considerably better. Despite this better dividend yield, CenturyLink got drilled this last year. Even the recent rally leaves the stock seriously underperforming the giants in the telecom sector.
The key takeaway is that CenturyLink is a good investment as long as the consistent earner and free cash flow generator has the highest yield in this group of slow growing, telecom stocks.
Disclosure: I am/we are long CTL.
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.
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