The telecom industry hosts some of the highest dividend payers in the market, and it is one of the most favored industries by income hunters. CenturyLink (NYSE:CTL) pays a large yield compared to a lot of other companies in the market - as a result, a large number of income hunters are attracted to the stock. The dividend cut at the start of the year caused a panic among investors, clearly indicating how much investors valued the dividend yield of the company. However, it has regained most of the lost value as the business prospects of the company remain intact. I am looking at CenturyLink from an income hunter's perspective and will try to evaluate the ability of the company to maintain/grow its dividends.
Future Business Prospects
First of all I will take a look at the future business prospects of the company. CenturyLink is the third-largest U.S. landline operator with over 14 million phone lines, and about 6 million broadband connections and operations across 37 states. However, the company continues to face stiff competition across the markets it serves. The fixed-to-wireless substitution coupled with the growing presence of alternative services such as the Voice-over-Internet Protocol (VOIP) service is one of the biggest issues faced by the company. However, the bread and butter of the company will be Qwest and Savvis - the acquisition of Savvis gave CenturyLink an entry into the lucrative cloud computing market, which is growing at an exceptional rate.
Furthermore, the local marketing strategy will deliver positive results in the Qwest market and will provide a competitive advantage. The company is focusing on four areas: broadband expansion, fiber cells, cloud computing and Prism TV to expand network capacity at the moment. In addition, the increase in the number of data centers will further strengthen its revenues.
Dissecting the Cash Flow Statement
While talking about the cash flows of the firm, I will not go in too deep in the past - I will only focus on the last fiscal year and the trailing twelve months. In the last twelve months, the company has a net loss of $245 million, which has resulted in bringing cash flows from operations to below $6 billion. In the last fiscal year, cash flow from operations was just above $6 billion. However, an increase in other non-cash items ($727 million) indicates that the losses have in fact come from the non-core business of the company (charge of impairment of goodwill of about $1.1 billion).
At the same time, the company has invested over $3 billion in new properties and other investments, indicating an expansion in operations. The financing cash flows portion of the cash flow statement depicts an interesting picture - CenturyLink issued $1.739 billion in new debt and paid back $1.758 billion. This shows that the company is trying to maintain its current debt levels. The next few entries in the statement are about stock repurchase and dividends, which will be discussed in the coming paragraphs. Overall, the cash flows of the company look solid at the moment, and with the increasing revenues from the broadband and cloud segment; I believe the cash flows will be further enhanced.
Valuation, Dividends and Stock Repurchase
A number of metrics are in favor of CenturyLink at the moment -- price-to-book and price-to-sales ratios are both at 1.1 for the company compared to 1.9 and 1.2 for the industry, respectively. Furthermore, operating and net margins are also in favor of CenturyLink. However, I will not call CenturyLink undervalued only based on these metrics. It should be kept in mind that dividend yield plays an important part for investors in deciding to invest in CenturyLink. At the moment, the stock yields about 6.8%, a substantial yield even after the dividend cut earlier in the year.
The company paid $1.44 billion in dividends over the past twelve months - the full year dividend expense will be considerably lower than the last year, which will enhance the overall cash position of the company. On the other hand, stock repurchases have resulted in a cash outlay of about $1.27 billion. However, this one time cash outlay will have a number of positive impacts in the future. Due to a decrease in the share base, the EPS will look better in the coming quarters - an improvement in revenues accompanied with a decline in number of shares will magnify the impact of better financial results. Moreover, a decrease in number of shares will further decrease the dividend expense, which will strengthen the overall cash position of the company.
I believe the company will be able to maintain the current dividend payments - however, we might not see an increase in the near future as the growth in telecom segment is very slow. Nonetheless, the recent moves will certainly enhance the balance sheet and cash flows of the firm.
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.