Is CenturyLink, Inc. Returning Too Much Capital to Shareholders?

CenturyLink investors love the company's capital return program, but because of the industry in which it operates its policy might actually hurt long-term shareholder value.

May 12, 2014 at 1:00PM

CenturyLink (NYSE:CTL) soared 6.4% on Thursday after the company announced first-quarter earnings that exceeded expectations. The company has seen a rather impressive 28% three-month stock gain as investors reallocate money into high-yield stocks and away from momentum stocks.

Nonetheless, CenturyLink is a company with bullish goals and growing competition from the likes of Google (NASDAQ:GOOG) and AT&T (NYSE:T). Therefore, given its forward dividend yield of 6.2% and its aggressive buyback program, should investors fear that CenturyLink's capital return program may be hurting its future?

CenturyLink is telling you something
CenturyLink is a large $21.3 billion well-established telecommunication services company. In the first quarter, it created $4.54 billion in revenue, which equated to growth of less than 1%.

With that said, CenturyLink has pretty much given up on finding explosive growth, and has elected to become a company that gives back to its shareholders. Specifically, it pays an annual dividend yield of 6.2%, and in this last quarter alone spent more than $600 million on buybacks and dividends combined.

Here's the problem: When a company has a quarterly EPS of $0.66, pays $0.54 in a quarterly dividend, and then spends another $0.50 plus per share in buybacks, there isn't a lot of cash left for growth, if any. CenturyLink had $850 million in free cash flow during the first quarter, and spent all but $200 million in giving back to shareholders.

Hence, CenturyLink's message is clear: "We're not in the business of creating shareholder value through growth, but will pay you to own our stock."

Why is this bad?
Essentially, we could poke holes at any of CenturyLink's many segments and make a case for why the company needs to make investments in order to protect its market share and to grow. But let's look at what might be the most vulnerable: the company's broadband business.

CenturyLink offers Internet speeds of up to 40 megabits per second (Mbps), and in its first quarter added 66,000 new customers from the fourth quarter to finish with 6.06 million total. In other words, this is a very important segment for the company, but one where CenturyLink is unable to make the investments necessary to keep pace with its peers.

Specifically, CenturyLink is facing growing competition from the likes of Google and AT&T. Google is in the process of building out its Fiber network -- already rolled out in two cities with 34 new territories on tap -- with speeds of 1 gigabits per second (Gbps). For those of you unfamiliar with these metrics, that's 25 times faster than CenturyLink's network.

Moreover, Google's Fiber has been so successful in its infancy that it has been able to require customers to sign-up in advance of the network even being built, and customers have responded with great enthusiasm. Initially, this was a project that was expected to cost Google up to $30 billion, but by capitalizing on high density areas and using the telephone poles of existing telecom companies, it has been able to cut back on costs, and many think Google could quickly become a dominant Internet provider in the next decade.

If that weren't bad enough, AT&T's U-Verse GigaPower is also in the process of speeding its delivery from 300 Mbps to 1 Gbps. Like Google, AT&T's presence with these speeds is limited, but the company recently announced plans to expand into 100 different cities in 21 metropolitan areas. Also like Google, GigaPower is a multibillion dollar project, but with that said, U-Verse is AT&T single most meaningful growth segment. Last year, it grew more than 20% and now accounts for 10% of the company's $130 billion of total revenue. Hence, it is very important.

Final thoughts
In regards to CenturyLink, broadband is just one example of many to illustrate large investments that need to be made that the company can not afford. Currently, and in the immediate future, CenturyLink's speed is up to par with other broadband competitors, but as AT&T and Google rollout their respective services, CenturyLink will be unable to compete in terms of speed.

This brings up the question of paying a 6% dividend: CenturyLink can not make the investments necessary to compete with such services because it's using all of its cash flow to return capital to shareholders. And with $20 billion in long-term debt, CenturyLink already has plenty of leverage on its balance sheet and may not be able to finance such investments. Investors likely wouldn't respond well to a public offering due to the company's policy of returning capital.

Therefore, in this particular instance, because of the industry in which it operates, a high dividend and lavish buybacks are actually a fundamental disadvantage, which does not bode well for long-term shareholders of CenturyLink. Hence, CenturyLink is returning too much capital to shareholders, and investors would be better served with a sizable reduction in its capital return program.

Your credit card may soon be completely worthless
The plastic in your wallet is about to go the way of the typewriter, the VCR, and the 8-track tape player. When it does, a handful of investors could stand to get very rich. You can join them -- but you must act now. An eye-opening new presentation reveals the full story on why your credit card is about to be worthless -- and highlights one little-known company sitting at the epicenter of an earth-shaking movement that could hand early investors the kind of profits we haven't seen since the dot-com days. Click here to watch this stunning video.

Brian Nichols has no position in any stocks mentioned. The Motley Fool recommends Google (C shares). The Motley Fool owns shares of Google (C shares). 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.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

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.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

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. It's also featured on several dozen 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 ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers