3 Reasons CenturyLink Will Return to Growth

Investors are being offered a 7% yield from a company that may return to real revenue growth within the year, am I missing something?

Feb 25, 2014 at 4:00PM

It might be hard to believe that a company that not long ago had to cut its dividend could potentially be a good investment. However, based on CenturyLink's (NYSE:CTL) recent performance, the company looks poised to outperform going forward. In fact, there are three reasons to believe that CenturyLink will return to revenue growth over the next year.

On the surface this sounds about right
It's common for many analysts to try and project a five year growth rate for the companies they follow. In CenturyLink's case, the average analyst expects the company's EPS to decline by roughly 1% over the next five years.

To most investors, this would seem to place CenturyLink's expected decline in earnings squarely between its competitors Frontier Communications (NASDAQ:FTR) and AT&T (NYSE:T). Frontier is expected to show a decline in earnings per share of more than 10% in the next five years, whereas AT&T is expected to show roughly 6% growth. However, the business dynamics at these three companies are very different and CenturyLink may do better than analysts expect.

In the current quarter, CenturyLink's revenue was split almost evenly between the companies Business and Consumer divisions. With Business revenue up 1% and Consumer revenue down less than 2% an overall decline of 1% sounds about right. However, there is no guarantee that CenturyLink's Consumer business will continue to decline at a near 2% rate.

In the current quarter for instance, CenturyLink reported voice line subscribers declined by roughly 5%, whereas Frontier reported a nearly 9% decline, and AT&T lost more than 11% on a year-over-year basis. This is the first reason to believe CenturyLink will return to growth. The company's better voice line retention rate, and growth from services such as high-speed Internet and video, should improve CenturyLink's Consumer performance.

By the end of 2014 the tide could turn
The second reason to believe CenturyLink will return to growth has to do with the simple math of improving revenues in the company's Business division. Though the Business division represents just over half of CenturyLink's overall revenue, continued growth will change this percentage over time.

With just a consistent 1% improvement in Business revenue and a continued decline of less than 2% in the Consumer division, in roughly four quarters CenturyLink's overall revenue would change from a slight decline to flat on a year-over-year basis.

In fact, this is a significant difference between CenturyLink and Frontier. In the last three months, Frontier reported Residential and Business revenue both declined by 5%. AT&T, on the other hand, had its huge wireless division report revenue growth of just under 5%, helping offset a revenue decline of more than 1% in the company's wireline business.

When you look at these numbers, it's fairly easy to understand why analysts expect Frontier to report negative earnings, AT&T to report growth, and CenturyLink to fall somewhere in the middle.

Believable projections
The third reason to believe in CenturyLink's return to growth has to do with the company's projections for free cash flow in 2014. CenturyLink expects free cash flow to fall between $2.6 billion and $2.8 billion for the full year. By comparison, in the last 12 months the company's core free cash flow (net income + depreciation-capital expenditures) came in just shy of $2.5 billion.

While it's true that CenturyLink is guessing, the company's Business and Consumer performance seems to suggest a potential improvement. Considering that CenturyLink's core free cash flow payout ratio was just over 52% in 2013, if the company delivers on its 2014 promises this payout ratio should be stable or a little lower.

While AT&T's dividend seems to be well covered with a core free cash flow payout ratio of just under 61%, the company's 5.5% yield can't match CenturyLink's 7% payout. Where Frontier is concerned, the company's current yield of better than 8% seems less safe with a payout ratio of almost 67% and more severe revenue declines across the board.

The bottom line is CenturyLink is poised to return to growth potentially by the end of this year. Investors looking for a well-supported high-yield stock should look no further.

Looking for real dividend gems? Look no further
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.

Chad Henage owns shares of CenturyLink. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. 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 Motley Fool has a disclosure policy.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.

 


Compare Brokers