Edited By Adam Isaac
CenturyLink (CTL) is one of the largest telecommunication service providers in the United States. The company is a leader in cloud infrastructure. CenturyLink provides data, voice and managed services in local, national and select international markets through its high-quality advanced fiber optic network and multiple data centers for businesses and consumers. The company also offers advanced entertainment services under the CenturyLinkTM PrismTM TV and DIRECTV brands.
CenturyLink offers a juicy dividend of $2.90 and an attractive dividend yield of 6.90%. In my previous article, I talked about the ability of the company to maintain its current high levels of dividend disbursements. I looked at the earnings potential, cash flows and the debt of the company. However, in this article, I go deeper in my analysis of the cash flows and debt coverage of the company, and through some metrics, try to ascertain the position of the company.
Free Cash Flows:
Dollars in millions
Free Cash Flows
Depreciation and other noncash charges
Funds from Operations (FFO)
Change in noncash current assets
Change in noncash current liabilities
Operating Cash flows
Free Operating Cash Flow
Long Term Debt
Source: SEC filings
For my analysis, I have decided to use the data from the past three full years of operations of CenturyLink. Over the three years, net income for CenturyLink has fallen. However, funds from operations have increased significantly. A decrease in net income can be attributed to the increased non-cash expense of depreciation and amortization.
The firm makes significant capital expenditures; as a result, the depreciation expense has gone up. For the previous year, capital expenditures amounted to just below $2.5 billion as the company acquired new properties and fixed assets. In addition, free operating cash flows for the firm have increased and currently stand at over $2 billion. This increase in free cash flows represents an increase of almost 300% for the company. However, the negative for the company here is the huge amount of debt. Prior to 2011, the firm had stable levels of debt at around $7.25 billion. In 2011, the debt levels for CenturyLink more than tripled and currently stand at more than $21 billion.
Funds from Operations(FFO)/Total Debt
FFO/Capital spending requirements
Free Operating Cash Flow+ interest expense/ Interest expense
Debt Service coverage
FFO to total debt is a classic ratio to verify the ability of the firm to generate enough cash flows to cover its debt. Current level of FFO to total debt ratio is lower than 2010 but equal to the 2009 levels. It indicates that the firm has been able to increase its cash flows to match the increase in its long term debt. However, this ratio for the company is at the edge. If, the company experiences a bad quarter or a slowdown in revenues the ratio will be severely hampered, and the dividends can take a hit.
As a result, I reiterate my stance that the firm should look to decrease its debt levels in order to ensure the dividends are stable and the company carries on its growth without any hitch. Meanwhile, the firm should be able to cover its capital expenditures but the coverage ratios have fallen from the year ago levels. However, currently the coverage ratios do not indicate any trouble for the firm.
Comparison with Peers:
Debt to Equity
It is evident from the table that the sector has quite high P/E ratios. CenturyLink seems cheaper compared to AT&T, Inc. (T), but looks a little expensive as compared to Frontier Communications (FTR). Overall, the stock is cheap based than AT&T based on multiples, but AT&T has better margins and ROE. Additionally, all three stocks have shown negative EPS growth over the previous three years, and net margins in the industry seem incredibly small.
I am confident that the CenturyLink's dividend is pretty safe. However, huge amounts of debt remain an issue for the firm. These high levels of debt can pull back firm in case of a slowdown in sales. In case of a bad quarter of sales, the dividends will be the first item to be affected by bad operating results. I believe the firm should follow Frontier's lead and try to decrease its debt levels.
At the moment, impressive operating results are covering the fact that the firm is under a lot of debt. However, it is clear from the peer analysis that the margins in the industry are not high, and slowly the margins will further shrink. In the end, shrinking margins coupled with massive levels of debt will force the company to cut its dividends. Nonetheless, CenturyLink dividends are safe in the near future, and the shareholders should be able to enjoy exciting dividends.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.