Watch stocks you care about
The single, easiest way to keep track of all the stocks that matter...
Your own personalized stock watchlist!
It's a 100% FREE Motley Fool service...
Local telecommunications companies like CenturyLink (NYSE: CTL ) offer income-focused investors a high yield combined with what seems to be a stable and seemingly safe investment. While each of the well-known local telecoms has been forced to cut its dividend over the last few years, there are three ways that CenturyLink appears better positioned than several of its peers.
Sometimes losing less means winning
It's a well-known phenomenon that customers are canceling their landlines in favor of using wireless phones or even voice over the Internet. These landline losses have been felt by all of the major players in the industry. Each company is aware that this is a dying business and is trying to grow other sources of revenue to offset these losses.
CenturyLink and its local telecom peer Windstream Holdings (NASDAQ: WIN ) are trying to grow their high-speed Internet business and enterprise offerings to try and offset landline losses. On the other hand, AT&T (NYSE: T ) has its huge wireless business to fall back on.
While lost business is never a good thing, limiting losses is one way for a company to extend its cash-generating capabilities. This is one way that CenturyLink is outperforming its peers, the company reported voice line losses of 5.7% on a year-over-year basis. By comparison, Windstream reported voice lines declined by 6% and AT&T witnessed an even steeper decline of more than 11%.
Investors should compare CenturyLink's voice line losses to its peers when the company reports earnings. If the company can limit its losses in the voice line business relative to its peers, CenturyLink's cash flow and revenue may outperform its peers.
Turning a negative into a positive
With CenturyLink outperforming its peers in the landline business, it should be no surprise that the company also outperformed its peers in overall revenue results as well. While negative revenue growth isn't exactly reassuring for investors, a 1.1% decline in revenue was still better than Windstream or AT&T's performance by a similar measure.
Since Windstream and CenturyLink's businesses are similar, Windstream's revenue decline of 3% is obviously worse than its peer. To compare CenturyLink to AT&T, we have to look at AT&T's wireline business, which reported a revenue decline of 1.4%.
This is the second issue investors need to watch when CenturyLink reports earnings. If the company can limit its revenue decline relative to its peers or even report an increase, shareholders may react positively to the news.
A very important core issue
Given that CenturyLink reported better revenue results and better voice line performance relative to its peers, it makes sense that the company's free cash flow performance is relatively better than its peers as well.
In the prior nine months, CenturyLink generated core free cash flow (net income + depreciation-capital expenditures) of $2.1 billion. On two opposite ends of the spectrum, AT&T generated $16 billion in the last 12 months, and Windstream generated just $457 million in core free cash flow over the last nine months.
The difference between the three companies is while AT&T produced significantly more free cash flow, the company's dividend payout ratio is actually higher than CenturyLink at 61% compared to 47% respectively. Windstream spends significantly more of its free cash flow on dividends at an over 97% payout ratio.
This is the third, and maybe most important, issue when considering CenturyLink's earnings. The company needs to maintain a low core free cash flow payout ratio in order for investors to believe that the dividend is sustainable.
No fooling around
Though income focused investors might find Windstream's yield of more than 13% too hard to resist; as we have seen, Windstream is being beaten out by CenturyLink on several fronts. While some investors might be willing to accept AT&T's 5.5% yield, the company's yield and payout ratio don't quite live up to CenturyLink's combination of traits.
With a yield of 7.5% and a reasonable payout ratio, CenturyLink could be called the best of the troubled local telecoms. If the company continues to outperform its peers in the three ways we've looked at, investors should be pleased. Investors will soon get answers to these questions, if you want to keep up with this high-yield stock, consider adding CenturyLink to your personalized Watchlist today.
CenturyLink isn't one, but here are nine solid dividend stocks
One of the dirty secrets that few finance professionals will openly admit is the fact that dividend stocks as a group handily outperform their non-dividend paying brethren. The reasons for this are too numerous to list here, but you can rest assured that it's true. However, knowing this is only half the battle. The other half is identifying which dividend stocks in particular are the best. With this in mind, our top analysts put together a free list of nine high-yielding stocks that should be in every income investor's portfolio. To learn the identity of these stocks instantly and for free, all you have to do is click here now.