CenturyLink Has Surprised Again

| About: CenturyLink, Inc. (CTL)

Summary

CenturyLink delivered another set of strong quarterly financial results, which beat EPS expectations by a big margin.

In my view, income-seeking investors should consider CTL's stock.

CenturyLink is generating strong free cash flow and returning substantial cash to shareholders via share repurchases and by very attractive dividend, currently yielding 6.78%.

Year to date, CTL's stock is up 26.7%, however, in my opinion, the shares have much room to grow.

In my previous article about CenturyLink (NYSE:CTL) from December 08, 2015, I suggested that income-seeking investors should consider CTL's stock for its generous dividend and strong free cash flow. Meanwhile, the company delivered another set of strong quarterly results and the stock has climbed 17.5% since my article was written. However, in my opinion, the stock is still attractive.

Since the beginning of the year, CTL's stock is up 26.7% while the S&P 500 Index has increased 1.0% and the Nasdaq Composite Index has lost 2.8%. However, since the beginning of 2012, CTL's stock has dropped 14.3%. In this period, the S&P 500 Index has increased 64.1% and the Nasdaq Composite Index has risen 86.9%.

CTL Daily Chart

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CTL Weekly Chart

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Charts: TradeStation Group, Inc.

On February 10, CenturyLink reported its fourth-quarter and full-year 2015 financial results, which beat EPS expectations by a big margin of $0.15 (23.1%). The company posted revenue of $4.48 billion in the period, also topped Street forecasts of $4.43 billion. CenturyLink showed earnings per share surprise in the last two quarters after missing estimates in the previous quarter, as shown in the table below.

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Data: Yahoo Finance

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Source: CenturyLink, Inc. Q4 2015 Earnings

In the report, Glen Post, chief executive officer and president, said:

CenturyLink achieved strong fourth quarter financial results as revenues, cash flow and adjusted diluted earnings per share exceeded the top end of our guidance for the quarter, driven by solid revenue performance and lower operating costs. Our Consumer segment continued to perform well as revenues grew both sequentially and year-over-year, while Business segment revenues grew sequentially on stronger core revenue generation. Our employees did a great job of containing costs during the second half of the year, which helped us exceed our goal of planned operating expense reductions for the second half of 2015.

Along its last-quarter earnings release, CenturyLink offered guidance for the full year and first quarter 2016. The company anticipates slightly lower operating revenues and core revenues in full-year 2016 compared to full-year 2015 due to expected legacy revenue declines more than offsetting anticipated increases in strategic revenue growth. Operating cash flow is expected to decline from full-year 2015, primarily driven by the continued decline in legacy and low-bandwidth data services revenues. However, it is worth noting that CenturyLink has been conservative in its guidance and in the last-quarter financial results, exceeded the top end of its guidance for the quarter.

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Source: CenturyLink, Inc. Q4 2015 Earnings

According to the company, it sees strong demand this year for high-bandwidth data and managed services from businesses, which it expects to help mitigate the anticipated further declines in its legacy revenues. The IT services business, while relatively small, continued to grow and gain traction during 2015, generating revenues that more than doubled compared to the prior year. CenturyLink also has a solid funnel of business services opportunities going into 2016, which it expects to help drive network and managed services revenue.

In my view, CenturyLink can achieve solid growth from its strategic businesses. Key growth drivers are increasing business customer demand for high-bandwidth data services and hosting solutions, along with growth in high-speed Internet and Prism TV subscribers.

In November 2015, CenturyLink announced that it was beginning a strategic review process of its data centers and colocation business. According to the company, this decision was made as part of its continued efforts to proactively manage its portfolio of assets, to best position the company to compete, to achieve profitable growth and drive shareholder value. On a conference call along with the fourth-quarter report, CEO Glen Post said that CenturyLink has made good progress with the process. According to Mr. Post, since its November announcement, the company has established a separate data center and colocation organization, including a separate management team. CenturyLink is also nearly complete with carve-out financial statements for its data centers, and it spoke to some interested parties who expressed interest in all options ranging from an outright purchase of its data centers and colocation business, to a partnership and or a joint venture. This is an ongoing process that could result in any one of these outcomes, including the potential sale of a portion of or all of its data center business. In my opinion, CenturyLink's decision to seek strategic alternatives for its data center makes sense since the data center and colocation business have become much more competitive, driving down revenue and profits.

CenturyLink is paying a very generous dividend; the forward annual dividend yield is very high at 6.78%. Although the payout ratio is high at 135.8%, In my opinion, the high dividend is sustainable due to the company's strong free cash flow. The company generated free cash flow, excluding special items, of $591 million in the fourth quarter and $2.7 billion in full-year 2015.

CTL Dividend Chart

CTL Dividend data by YCharts

CenturyLink completed $1 billion repurchase program in the fourth quarter. The company repurchased approximately 32 million shares under the program since May 2014.

Valuation

CenturyLink's valuation is very good. The forward P/E is low at 12.81 and the price to free cash flow is also low at 16.02. Furthermore, the price to sales ratio is very low at 0.96 and the Enterprise Value/EBITDA ratio is also very low at 5.46.

Ranking

According to Portfolio123's "Momentum Value" ranking system, CTL's stock is ranked first among all 45 Russell 1000 stocks yielding more than 5%, as shown in the table below (data as of March 29).

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The "Momentum Value" ranking system is quite complex, and it is taking into account many factors like; Yield, price to book value, trailing P/E, price to sales, return on equity, sales growth and relative strength, as shown in the Portfolio123's chart below.

Back-testing over sixteen years has proved that this ranking system is very useful; the reader can find the back-testing results of this ranking system in this article.

Summary

CenturyLink delivered another strong set of quarterly financial results, which beat EPS expectations by a big margin. Revenues, cash flow and adjusted diluted earnings per share exceeded the top end of its guidance for the quarter. In my view, income-seeking investors should consider CTL's stock. The company is generating strong free cash flow and returning substantial cash to shareholders via share repurchases and by very attractive dividend, currently yielding 6.78%. CenturyLink's valuation is very good; the forward P/E is low at 12.81 and the Enterprise Value/EBITDA ratio is very low at 5.46. Year to date, CTL's stock is up 26.7%, however, in my opinion, the shares have much room to grow.

Disclosure: I/we 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.