It seems that as the telecommunication age continues to unfold, the current directive of every major company is to find a means by which to provide all types of content to all types of customers through all types of delivery methods and devices. Essentially, the telecommunications industry has very conservative goals and will likely cure cancer and invent personal time travel devices any day now as well. This industry is currently dominated by three main players, Verizon (VZ) and Comcast (CMCSA), and AT&T (T), followed by a few smaller rivals, CenturyLink (CTL) and Time Warner Cable (TWC). Within this group, the overall potential of CenturyLink seems the most interesting based on news, income and the potential price spike that may be driven by upcoming earnings.
CenturyLink Making News
Over the past few weeks, CenturyLink has been recognized in a variety of forums. The company was awarded a Frost & Sullivan Consumer's Choice Award for 2011 for Best Landline Telephone Service Provider. As telecom moves further and further away from landline business, this type of recognition may seem underwhelming, but those companies that forget their bases often suffer. Additionally, the company was recognized by ATLANTIC-ACM with the U.S. Long Haul Wholesale Carrier Excellence Award. While neither of these awards, as awards or as news events, is likely to serve as major catalyst for the stock, they provide evidence that the company is continuing to run well as it works to smooth out the growing pains that might have been caused by the Qwest acquisition.
In terms of news that should be seen as a potential catalyst for the stock, Cognizant, a leading IT consulting and service provider, recently selected Savvis to provide cloud computing solutions for its clients. Savvis, now a CenturyLink company, was recently acquired by CenturyLink to help expand its product offerings into the cloud computing arena. The company, which paid $2.5 billion for Savvis is betting big on cloud computing and the business arena as its primary growth target. Cognizant is widely respected in both the IT consulting and telecommunications industries. Its selection of CenturyLink represents a significant vote of confidence for the company. This may be acknowledged by the market and could serve as a positive catalyst.
CenturyLink's Income Potential for Investors
With a dividend yield of 7.5%, the stock offers a very appealing income option for investors searching for yield at a time when Treasuries are flirting with the 2.0% level. In a recent article, analysts at Seeking Alpha proclaimed the stock to be an attractive fixed income play. In that same article, the analyst surmises that if the company beats expectations at its next earnings announcement, it is likely to raise its dividend. While this certainly falls on the aggressive end of the spectrum, it is not unreasonable to believe that the company may wish to signal its strength to the market if it is able to beat earnings expectations. The company had followed a pattern of regular dividend raises for several years prior to 2011. In 2011, the company did not raise its dividend, arguably in order to maintain its cash for the purpose of funding the various acquisitions made recently. Even with this freeze in the dividend, the company has a dividend payout ratio of 36%. Even were the company to leave its dividend unchanged, the stock would still present an attractive income option. As such, the stock seems attractive regardless of whether the company decides to raise its dividend or not.
To place this level of income in context relative to CenturyLink's peers, Verizon has a dividend yield of 5.3%, Comcast has a dividend yield of 2.2%, AT&T has a dividend yield of 5.7% and Time Warner Cable has a dividend yield of 2.7%. On a valuation basis, if one considers the price-to-earnings ratios of each company - Time Warner has a P/E of 16.4, AT&T has a P/E of 46.2, Comcast has a P/E of 19.7, Verizon has a P/E of 44.9 and CenturyLink trades at 35.6 times earnings - the company does not stack up as well. However, when considered in the context of the growth and expansion that CenturyLink has undergone recently, a basic valuation metric may not be an appropriate tool with which to analyze the company.
The Path Ahead
Where Verizon has made clear its intention of aggressively pursuing the consumer market, what has likewise become clear for CenturyLink is that it sees its future with its business clients. The addition of Savvis was a major move to expand its cloud computing capabilities and make it a global leader amongst enterprise clientele. Further cementing this position is a recent press release by the company in which its joint venture with Digital Realty Trust (DLR) was announced. The joint venture was formed with the purpose of acquiring a 165,000 square foot property near Hong Kong with the capability of hosting approximately 5.8 megawatts of IT load capacity. The primary purpose of the location is to significantly expand the company's cloud computing capabilities and is in keeping with Hong Kong's goal of becoming such a hub. This move, in combination with the acquisition of Savvis, provides clear evidence that the company is targeting the cloud for future success and growth.
When earnings are announced next month, the company may demonstrate a first step towards this ambitious objective, but with the dividend as a backstop, investing ahead of earnings offers significant upside potential.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.