Has CenturyLink Become the Perfect Stock?

Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?

One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, then decide if CenturyLink (NYSE: CTL  ) fits the bill.

The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:

  • Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
  • Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
  • Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
  • Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
  • Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let's take a closer look at CenturyLink.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

5-year annual revenue growth > 15%

30.8%

Pass

 

1-year revenue growth > 12%

31.6%

Pass

Margins

Gross margin > 35%

63.6%

Pass

 

Net margin > 15%

8%

Fail

Balance sheet

Debt to equity < 50%

98.6%

Fail

 

Current ratio > 1.3

0.99

Fail

Opportunities

Return on equity > 15%

4.9%

Fail

Valuation

Normalized P/E < 20

12.19

Pass

Dividends

Current yield > 2%

9%

Pass

 

5-year dividend growth > 10%

63.9%

Pass

       
 

Total score

 

6 out of 10

Source: S&P Capital IQ. Total score = number of passes.

When we looked at CenturyLink last year, it had an identical score of six. The company still has an amazing yield and keeps milking its market niche for all the profits it can.

As a rural telecom company, CenturyLink joins peers Windstream (Nasdaq: WIN  ) and Frontier Communications (NYSE: FTR  ) in catering to underserved customers outside major urban areas. Lately, the industry has gone through a lot of consolidation, as Frontier bought substantial assets from Verizon (NYSE: VZ  ) and CenturyLink completed its acquisition of Qwest.

Rumors have flown that CenturyLink might buy struggling Sprint Nextel (NYSE: S  ) , which many see as the odd provider out in the aftermath of a possible AT&T (NYSE: T  ) merger with T-Mobile. But the company said it isn't thinking about an acquisition right now, instead focusing on integrating its new Qwest markets.

Of course, as with most acquisitions, CenturyLink's Qwest buy made a temporary dent in the company's earnings. But the huge growth in sales and cash flow already show how important the CenturyLink's acquisition strategy is to its long-term success.

CenturyLink's biggest obstacles on its path to perfection include its debt and low returns on equity. But if it can build on the momentum its mergers and acquisition activity has started, CenturyLink could easily add better measures in those categories to the huge dividends it pays to its shareholders.

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate out the best investments from the rest.

Click here to add CenturyLink to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Finding the perfect stock is only one piece of a successful investment strategy. Get the big picture by taking a look at our "13 Steps to Investing Foolishly."

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. Motley Fool newsletter services have recommended buying shares of AT&T. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.

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