CenturyLink: This Dividend King Is A Buy

| About: CenturyLink, Inc. (CTL)

CenturyLink (NYSE:CTL) is an appealing asset due to its high dividend and potential for long-term growth worldwide. CenturyLink is effectively transitioning from its legacy products into its strategic portfolio bolstered by key acquisitions over the past few years. The Qwest and Savvis acquisitions were instrumental during 2012 in improving CenturyLink's revenues while offsetting declining returns from legacy products. CenturyLink is focused on expanding its enterprise portfolio of products for private firms and government contracts across the globe. CenturyLink was recently awarded three task orders with the FCC and GSA while it is in the midst of closing another deal to improve its international enterprise portfolio. Current shareholders should hold CenturyLink for the industry-high dividend and potential capital appreciation as it continues to grow into a telecommunications provider for enterprises and governments around the world.

CenturyLink is most comparable to the major U.S. telecoms that deal with legacy products and enterprise services like Frontier (FTR), Windstream (WIN), Verizon (VZ) and AT&T (T). CentruryLink's market cap is around $26 billion. Frontier is the smallest at around $5 billion and AT&T is the largest at around $217 billion. CenturyLink and AT&T have the highest price-to-earnings ratios among these telecoms - both stocks are around 50 times earnings. Windstream has the highest price-to-book ratio of around 4.63 - both Verizon and AT&T have higher price-to-book ratios than CenturyLink's 1.3. Frontier has the lowest price-to-book at around 1.1.

Frontier has the lowest price-to-sales ratio around 0.93. CenturyLink is around 1.43 and is only lower than AT&T's price-to-sales ratio of around 1.7. CenturyLink has the highest sales growth over the past 5 years at around 44%. Frontier is the next closest at 20.9%. CenturyLink's 4.68% sales growth in the previous quarter, YOY is higher than both Verizon and AT&T by 100 bps and 430 bps, respectively. CenturyLink's 51.45% gross margin and 11.9% operating margin exceed AT&T's by around 400 bps. CenturyLink's 2.5% return on equity only exceeds Frontier's by 20 bps while CenturyLink has the lowest net margin at around 2.35%.

CenturyLink's $0.85 EPS is higher than Windstream, Frontier and AT&T; Verizon's EPS is $1.01. CenturyLink's current ratio is around 0.64 while its debt-to-equity ratio is around 1.06. CenturyLink's beta score is below one but is usually higher or close to Verizon and AT&T. CenturyLink's average daily volume is around 5.6 million shares - this is the lowest among the telecoms. CenturyLink's annualized dividend is around $2.90, Verizon's $2 annualized dividend is the next highest. AT&T stock is up 29% YTD through 9/11/12, while CenturyLink's stock is up 20.2%. Century's price has decreased by around 0.2% since its last earnings release.

CenturyLink's recent earnings release detailed how its four categories of products have performed in its four segments thus far in 2012. CenturyLink operates in 37 states and has 52 data centers throughout North America, Asia and Europe. By the end of the first half 2012, CenturyLink increased broadband subscribers 4% YOY to 5.76 billion and saw access lines decline 6% YOY to 14.1 billion. The anticipated decline of access lines for 2012 is projected to range from 5.7% to 6.3%. Second quarter operating revenue increased to $4.61 billion from $4.4 billion and operating income increased to $657 million from $480 million. Operating expenses were relatively flat while net income decreased to $74 million from $115 million, YOY.

CenturyLink identifies declining revenue through the past few years due to declines in access lines, intrastate access rates, and usage. CenturyLink is focused on offsetting the decline in legacy products through offering new services like integrated services in bundles, broadband, cloud hosting and managed hosting to new and existing customers. In the 2012 second quarter, strategic services revenue increased to $2.07 billion from $1.72 billion, YOY. Legacy services revenue decreased to $2.1 billion from $2.28 billion, data integration revenue increased to $170 million. Strategic revenue in the most recent quarter was due to the integration of services from the Savvis acquisition. Qwest assets contributed in the first quarter as well.

Operating expenses in the first half 2012 increased to $7.9 billion from $5.1 billion YOY primarily due to Savvis and Qwest integration costs. The regional markets segment accounted for $2.4 billion in revenue, 58% was income. Legacy services accounted for $1.51 billion of regional market revenues. Wholesale markets revenue decreased to $944 million, 70% was income. Enterprise markets-network revenue was $648 million, 26% was income while enterprise markets-data hosting revenue was $277 million, and 24% was income. Demand and growth from the strategic services in each segment is offsetting the declining demand for legacy products. It has yet to be seen whether CenturyLink's enterprise growth can outpace the shrinking revenue in the legacy divisions.

In early August, CenturyLink announced it would buy assets from Ciber's ITO business through the Savvis subsidiary. Ciber provides IT consulting and outsourcing services to 19 countries in Asia, North America and Europe as well. CenturyLink will pay $7 million for ITO assets in several territories that consist of technology, infrastructures and data facility, Savvis will also take on 750 Ciber employees as well. This agreement will help CenturyLink improve its enterprise IT portfolio for markets around the world.

In late August, CenturyLink received a $20 million project order from the U.S. GSA to provide VoIP services throughout the next 5 years in 8 regional offices located in the Rocky Mountain region. In early September, CenturyLink also won two task orders with the FCC worth $9.6 million to provide WAN services including VPN as well as MTIPS for the next five years. These services from CenturyLink will help the FCC capitalize and operate with the speed and security of modern networks.

CenturyLink recently received approval from Arizona state regulators to increase its residential and business rates for dial-tone services for up to 10% and 25%, respectively, through the next three years. This can help offset some of the declines it's been seeing in its legacy division. CenturyLink also recently extended its fiber network to include five data centers in the Charlotte, North Carolina area. CenturyLink is on schedule with its 2012 guidance and will continue to build its portfolio of strategic services in order to meet enterprise demand within the US and overseas.

Disclosure: I 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.