CenturyLink: Should You Buy This 7% Yielder?

| About: CenturyLink, Inc. (CTL)


Like many of its peers, CenturyLink is suffering from lower revenues on its wireline business, leading to overall weak financial figures.

Even though the company slashed its dividend by 25% in 2013, it still offers an attractive yield near 7%.

However, its peer Windstream seems to offer a better risk-return profile, as it suffers from the same headwinds as CenturyLink but has a dividend yield of 12%.

CenturyLink (NYSE:CTL) is the third largest wireline telecommunications operator in the U.S., offering one of the highest-dividend yields within the sector. However, as is usual with high-dividend yielders, it may be a good opportunity for income investors or a dividend trap. Currently, it has a dividend yield near 7%, which is attractive but below some of its closest peers like Frontier Communications (NYSE:FTR) or Windstream (NASDAQ:WIN). CenturyLink has a market capitalization of about $18 billion, and is traded on the New York Stock Exchange.

CenturyLink is an American multinational communications company headquartered in Monroe, Louisiana. It provides communications and data services to residential, business, governmental and wholesale customers. The company operates as a local exchange carrier and Internet service provider in U.S. markets and is the third-largest wireline telecommunications company in the U.S. in terms of lines served (13 million), behind AT&T (NYSE:T) and Verizon (NYSE:VZ). On December 31, 2013, it also served approximately 6 million broadband subscribers. The company has approximately 47,000 employees.

CenturyLink has performed a few large acquisitions over the past few years, namely it acquired Embarq, Qwest and Savvis during a roughly 24-month period between mid-2009 to mid-2011. As a result of its recent acquisitions, the company now provides a diversified array of communications services to residential, business, governmental and wholesale customers in a wide range of markets throughout the U.S. and internationally. With these acquisitions the company's size more than doubled in the number of broadband subscribers and fixed access lines, while revenues were up as well from $7 billion in 2010 to $15.4 billion in 2011. It also changed its profile to include more urban assets.

Currently, CenturyLink's business is diversified across four operating segments: consumer, business, wholesale, and data hosting. Its business unit is the company's largest, being responsible for about 34% of its revenues, which consists generally of providing strategic and legacy products and services to commercial, enterprise, global and governmental customers. Consumer follows closely with a 33% weight on revenues, which provides strategic and legacy products and services to residential consumers.

CenturyLink faces fierce competition across its operating businesses, from other telecoms companies and cable and satellite companies, wireless providers, and national telecommunications providers. Like its closest peers Windstream and Frontier, the company has been losing revenues on its wireline business, losses that aren't completely offset by increases for broadband services. Unsurprisingly, given its competitive landscape, CenturyLink has reported relatively weak financial figures over the past few quarters. The company's top-line growth continues to be negatively affected by lower revenues on legacy services, which include mainly wireline services. In 2013, the company's revenues declined by 1.5% to $18 billion, primarily due to legacy services revenues, which decreased by 7%. Going forward, its revenues are expected to continue to drop over the next two years, which is clearly a weak outlook.

Regarding its profitability, the company's performance is not much better as operating income tumbled by 46% to $1.45 billion. This represents an operating profit margin of only 8%, which is among the lowest within its industry. The company's net profit changed from $722 million in 2012 to a net loss of $239 million in the past year, mainly due to goodwill impairments of more than $1 billion during the year.

CenturyLink's goodwill remains at more than $20 billion on its balance sheet, or 40% of its total assets. If the company's earnings from acquired businesses don't perform as expected going forward, CenturyLink may be required to record additional charges to earnings. However, these charges are non-cash and therefore do not affect the company's ability to pay dividends because its cash generation will be the same. Nevertheless, its dividend coverage based on earnings will be affected, reducing investors' perception of CenturyLink's dividend sustainability.

Regarding the company's dividend history, it does not show a good recent history. After three years paying an unchanged dividend of $2.90 per share, CenturyLink slashed its dividend by 25% to $2.16 per share annually. Its dividend payment frequency is quarterly, at $0.54 per share. Considering its current stock price, CenturyLink offers a dividend yield of close to 7%, which is clearly a high-yield and attractive for income investors. The company also has a $2 billion share buyback program ongoing, improving its shareholder remuneration policy and further share repurchases are likely over the next couple of years.

As the company reported losses in 2013, its dividend payout ratio based on earnings is meaningless. On the two prior years its dividend payout ratio was above 200%, clearly a warning sign regarding its sustainability. On the other hand, CenturyLink's cash flow generation is quite good, enabling it to finance its investments and dividend payments. Its payout ratio based on cash flows, which may be the best measure to assess its dividend sustainability, is about 55%. This ratio is acceptable and within the sector's average, so if the company is able to stabilize its business, its dividend should remain the same for the next few years.


Even though CenturyLink's dividend does not seem a trap in the short term, its yield is considerably below its closest peers Windstream and Frontier Communications, which suffer from basically the same operating headwinds and show a similar business profile. Thus, CenturyLink's yield is interesting, but a better risk-return profile seems available elsewhere, specifically considering Windstream's 12% yield. I've recently covered Windstream and I think it can sustain its dividend in the medium term, as the company's free cash flow generation seems to be enough to finance its superior shareholder remuneration, providing thereby a better investment proposition than CenturyLink.

Disclosure: I am long T. 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.

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