Dividend Analysis: CenturyTel Inc.

Today’s analysis has me looking at CenturyTel Inc. (CTL), which trades on the NYSE and is also a member of the S&P 500 Dividend Aristocrats (which, in case you don’t know, means that the company has raised their dividend in each of the last 25 years). Let’s see if CenturyTel Inc. is worthy of joining our portfolio of superior dividend yielding stocks!

Company Profile:

From Yahoo Finance

CenturyTel, Inc., together with its subsidiaries, operates as an integrated communications company. The company provides a range of communications services, including local and long distance voice, Internet access, and broadband services in the continental United States. Its services include local exchange and long distance voice telephone services, as well as enhanced voice services, such as call forwarding, conference calling, caller identification, selective call ringing, and call waiting; network access services; data services, including high-speed and dial-up Internet services, and data transmission services over special circuits and private lines; and fiber transport, competitive local exchange, and security monitoring services.

Its market capitalization is $5.07B.

Company Fundamentals:

The first thing that catches my eye is the incredibly low return on invested capital. The ROIC seems to be firmly planted in the 5% to 6% range. Although the 5-year average ROIC is 7.1%, I usually prefer to see a minimum of 10% for ROIC.

With all its debt, CTL is only able to leverage that debt to earn a return on equity of 9.01% over the last 5 years. The total debt makes up almost 51% of CTL’s capital. In my opinion, these are not very impressive numbers.

Its equity growth rates had been decent in the early part of the 10-year period, but have quickly been falling off. The 9-year average equity growth rate is a respectable 13.82%. The 5-year rate drops to 10.42%. The 3-year rates drops further to 5.53%, and last year’s rate was a measly 2.08%. This is definitely not the trend I want to see.

Its earnings per share growth rate has been equally unimpressive. The 9-year average is 6.11%, the 5-year average is 10.01%, the 3-year average is 1.52%, and last year’s EPS growth rate has improved to a whopping 4.58%.

Sales growth rates have almost been non-existent over the last 3 years.

From these fundamentals, I would not add this stock to my portfolio.

Dividend Fundamentals:

CenturyTel Inc.’s current dividend yield is a paltry 0.57%, and it has been increasing that dividend over the last 25 years! Obviously that dividend yield is well below the yield available from the indices such as the S&P 500 (at 1.98%), and the DJIA (at 2.29%).

And yes, it has increased its dividend every year. But as you can see over the last 10 years, it has been a steady increase of around 5% each and every year. The 9-year average rate is 4.84%, the 5-year rate is 4.56%, and last year’s rate was 4.17%.

Now, the dividend payout ratio is incredibly low at 9.96%, and it has not veered from that amount over the last 10 years. So it has remained consistently very low, which gives management some flexibility.

Its cash flow growth rates have also been decent. The 9-year average is 9.33%, the 5-year average is 9.47%, and last year’s cash flow growth rate was 11.92%. So it is definitely increasing its cash flows to more than cover its dividend increases.

Valuation Models:

Let’s use my 3 valuation techniques to determine how the market has priced CenturyTel Inc.

From a yield perspective, CTL has been very consistent. The 10-year average high dividend yield is 0.85%, and the 5-year average high dividend yield is 0.86%. If I demand the 5-year average high dividend yield, then my target price is $30.07. At the current price of $45.76, Mr. Market is demanding a premium of 52%!

Strangely enough, Mr. Benjamin Graham would not agree with that assessment. The Graham number is $41.48, which implies a premium of only 10.33%!

For my discounted present value calculation, I used the following inputs:

A future EPS growth rate of 3.5% (I had estimated a future EPS growth rate of 5.53%, but the analysts have forecast a more conservative 3.5%).

A future P/E of 7 (for a historically low P/E, CTL has achieved 14.2. But as a rule of thumb, investors should only be willing to give a P/E that is twice the future EPS growth rate).

A dividend yield of 0.86%.

A future dividend growth rate of 4.17%.

Using these inputs, my target price is $7.27. Of course, that is way off from today’s price. But this is a recurring issue with this valuation model. When there are stocks with very low future EPS growth rates (such as Consolidated Edison Inc. (ED)), then it seems that investors are willing to allow that company to have a P/E ratio that is just too high. For the historical P/E to be valid, then CTL should have a future EPS growth rate of 7.1%. And it is the analysts that have forecast the EPS growth rate to be half that amount.

Check my CTL calculations.

Here is the 1 year stock chart:

click to enlarge

As you can see, CTL has had a decent run up over the last year. At no time was it ever at or below my dividend yield target price of $30.07.

Conclusion:

From the lagging fundamentals to the rather paltry 5% dividend increase per year, I do not think that CenturyTel Inc. belongs in a portfolio of superior dividend yielding stocks.

What is your opinion?

Full Disclosure: I do not own any shares in CTL.