CenturyLink Has Upside Potential, With Future Dividend Growth Expected

| About: CenturyLink, Inc. (CTL)

In our previous report on CenturyLink, Inc. (NYSE:CTL) dated July 9, 2012, we took a bullish stance on the stock, based on the company's robust revenue growth, increasing PrismTV subscribers, and improving line loss trend. Post the company's earnings release, we maintain our previous stance, as CTL has posted positive numbers on its key metrics. Apart from potential capital appreciation, the stock is attractive from a dividend perspective, currently yielding 6.9%, higher than that of AT&T Inc. (NYSE:T) and Verizon Communications (NYSE:VZ).

Quarterly Results

CenturyLink, Inc. a telecom operator in the U.S., announced its quarterly results on August 8, with its profits slipping in the quarter, despite a rise in revenues. Below is a brief summary of the latest results posted by the company, and how they compare to expectations.

CenturyLink Q2 2012 results



% surprise

Revenues (B)








As seen in the table above, the company was able to beat analyst expectations. However, it should be noted that the actual EPS, as reported by the company, is $0.12, down from the previous year's $0.19. The drop in earnings was largely due to early retirement of debt, as well as costs related to its acquisitions. The early retirement of debt had a major impact on the company's earnings, taking 20 cents off its reported EPS. Excluding these negative items however, the company did beat analyst expectations for earnings, which do adjust for these extraordinary items.

Total revenues jumped by 5% in the quarter, as compared to Q22011, largely due to its Savvis acquisition, which was completed in the start of July last year. Savvis, which now provides hosting services under the company's Enterprise Markets Group, improved revenues by almost 7% in the quarter, as compared to the pro forma second quarter of last year.

Demand for high speed internet and PrismTV also led to an improvement in revenues for the quarter. Despite adding less broadband customers in the quarter (18,000), largely due to seasonality, the company improved its line loss trend, which is now at a 6.1 % decline as compared to Q22011's annual decline of almost 7.5%. As mentioned in our previous report on CTL, PrismTV continues to be the growth driver for the company, and with its triple saving bundle package, it has continued attracting customers to its competitively priced services. During the quarter, CTL expanded its PrismTV subscriber base by over 10%, as compared to the same quarter of the prior year. The company was also able to achieve expense synergies of $380 million from its Qwest acquisition, higher than what it achieved in the first quarter of the year.

The company has raised its guidance for the coming quarter, now expecting revenues to be in the range of $4.5-$4.9 billion, and adjusted EPS to be $0.54-$0.59. As for the full year results, CTL has raised the low end of its guidance for operating revenues, operating cash flows and earnings per share. The third quarter guidance is in line with analyst expectations.

The stock has traded up almost 7% since our last analysis, and even though it is currently trading close to its 52-week high of $42.7, we believe it still has upside potential. Moreover, it offers a very attractive dividend yield of 6.9%, higher than its peers AT&T and Verizon. This high yield compares well to the current 10-year treasury yield of only 1.68%. Also, the company has healthy operating cash flows, and its earnings are expected to grow by 12% over the next five years, which is higher than its peer median growth. This should allow for future dividend growth.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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