CenturyLink (CTL) is an integrated telecommunications company that offers a full range of wired telecom products and services to its customers in 33 states across the country. The stock has traded in a relatively narrow range over the past 52-weeks, between $31 and $43, and it currently trades at around $38. The company currently boasts a dividend yield of 7.5%. Even without the dividend, I believe the stock is a buy. With the dividend, I think it's a screaming buy.
I'll take one of those, and one of those, oh and I gotta have one of those too…
In 2010 CenturyLink acquired its huge rival Qwest for more than $12 billion. Due to regulatory reviews, the deal took nearly a year to close, finally closing in April of 2011. A few weeks later, CenturyLink then bought Savvis for $2.5 billion. In 2009, Embarq and CenturyTel merged in an $11.6 billion to form the new company, CenturyLink. So we can safely say that this is a management team that is not afraid to pull the trigger on large deals.
The above mentioned deals along with smaller ones have led to enormous growth for CenturyLink. In 2009 the company had just under $5 billion in total revenue. By 2011 that figure had increased to more than $15 billion. The revenue growth has trickled down to the bottom line, which has allowed the company to meet its lofty dividend yield and also pushed the share price from around $28 at the start of 2009 to $38 today. The price to pay for this type of revenue growth, however, is the rise of the company's long-term debt, which has tripled from 2009 levels to more than $21 billion at the end of 2011. And with debt comes interest expense, also known as debt-service.
CenturyLink's cost to service debt was nearly $1.1 billion last year, nearly triple what it was in 2009. But having 7% of its sales put towards interest expense is a price that CenturyLink must pay. Without a presence in wireless, CenturyLink will likely need to continue to grow through smart acquisitions, as it loses residential voice customers each year. After the Qwest acquisition closed in mid-2011, the combined company had 15 million phone lines. This was the same amount as Qwest alone had six years earlier. The trend of people replacing wired phone lines at home with wireless and/or VoIP from competitors like Vonage (VG), is not one that will change.
If anything, the rate at which this transformation takes place may increase exponentially going forward. But I believe the company's clear plan to replace this lost voice revenue with new market opportunities like "cloud" storage, is a good one. The purchase of Savvis was made to this end. With rising demand for cloud storage, Savvis' core business is expected to grow organically by greater than 10% this year and it the transaction will be accretive to CenturyLink's earnings in 2012.
And when it's not buying its friends, it chooses them wisely
Without a footprint in wireless, CenturyLink has teamed up with best of breed wireless company, Verizon (VZ), in order to provide its residential and business customers with a one-stop shopping experience. What does this really mean? Well, if a new college graduate, let's call him Joey, moves out of his parents' house and picks up an apartment in a new state, he may need to set up not only home internet and cable services, but wireless as well, a new cell number and a new provider. Under the partnership that CenturyLink has with Verizon, Joey can now arrange all of his needs under the umbrella of CenturyLink. One phone call, no hassle.
CenturyLink is also in bed with DIRECTV (DTV). By partnering with the satellite television provider, CenturyLink retains the ability to provide bundling services to, typically rural, areas of the country where it may offer home voice services, but may not provide cable television, for example. As with the Verizon arrangement, it not only gives CenturyLink a broader reach, it affords its customers cost savings and a reduction in billing aggravation at the same time.
It really is a nice little present, that dividend
While AT&T (T) offers a dividend yield of just over 5% and Verizon offers a yield just under 5%, less than double the current yield on a 30-year treasury bond, or t-bill, CenturyLink pays interest to its shareholders at closer to junk bond status, 7.50%. It's not quite that of rivals Windstream (WIN), 10.50%, or Frontier Communications (FTR), 11.40%, but I believe that CenturyLink is better than those companies. Better than Windstream, who recently announced mildly disappointing first quarter earnings, for sure, if I was to compare it as an investment to Frontier the tally would be closer, but I'd still lean towards CenturyLink. Frontier also disappointed investors this month with first quarter earnings that fell 6% year over year.
Is this the right entry point?
CenturyLink has a trailing twelve month (TTM) P/E ratio of around 42. The slower growing Windstream has a TTM P/E ratio around 25. The markedly smaller Frontier currently sports a TTM P/E ratio near 30. Frontier, however, is even more leveraged than CenturyLink. In 2011 Frontier needed almost 13% of its total revenue to service the interest on its debt. The slow-growing giants of telecommunications, Verizon and AT&T, have TTM P/E ratios of 44 and 48, respectively. So is this the right entry point for CenturyLink? I think it's as good as any and I don't consider it to be particularly expensive, given how its management has executed strategically.
Short and sweet takeaway
I would be a buyer of CenturyLink at its current price of around $38. And if the share price dipped, I would buy some more. A 7.5% yield in a rapidly growing company? Yes, I gotta have one of those too…