One of last year's biggest losers is showing signs of life in recent weeks. Shares of CenturyLink (NYSE:LUMN) have soared 35% since bottoming out two months ago. The regional telco is smoking out income investors as a result of its hefty yield, and value investors are starting to ponder the turnaround potential after a series of beefy acquisitions.
CenturyLink stock took a 30% hit last year, a still significant 22% slide if you tack on the generous quarterly dividends. The shares have fallen sharply for three consecutive years, but new leadership and percolating excitement surrounding the synergies of its latest buyout cast CenturyLink as a prime candidate to bounce back in 2018.
Making the right connection
Regional telcos have been in a world of hurt since folks began replacing their landlines with mobile gadgetry. The hardest hit players are those keying on rural underserved markets where pushing into broadband and business services is easier said than done. CenturyLink is a survivor, and it remains profitable. However, revenue has declined for five consecutive years with margins eroding along the way.
CenturyLink isn't standing still. It has made the most of sector consolidation by snapping up Embarq, Qwest, and Tier3 over the past decade. It recently closed on its $25 billion deal for Level 3 Communications, a transaction that will finally see revenue growing higher in 2018 (even if organic top-line results continue to slide).
Level 3 could be the game changer for CenturyLink, and not just because it broadens the combined company's reach and offerings. Business customers will now account for roughly 75% of the core revenue at CenturyLink with strategic services making up the lion's share of that tally. The goal here is for CenturyLink to realize a whopping $850 million in operational synergies that will be realized over the next three years. Level 3 also brought its helmsman Jeff Storey to step in as the new company president and COO. He will ascend to CEO next year.
A big draw for investors is CenturyLink's quarterly payout of $0.54 a share, translating into a 12.1% yield even after the recent stock surge. The sustainability of its distributions -- its payout ratio has been higher than 100% every year since 2010, and it hasn't cut its rate since early 2013 -- is a popular topic for the market, but CenturyLink is committed to its bountiful yield.
"I'm confident about our ability to meet the dividend obligation and believe it is an important component of our equity story," Storey said in CenturyLink's most recent quarterly earnings call.
Absorbing Level 3 into its bloodstream and unlocking the benefits of the combination won't happen overnight. Analysts see earnings per share declining sharply in 2018, and these are the same Wall Street pros that have overestimated CenturyLink's bottom-line showing in each of the past four quarters. However, investors who are willing to take on above-average risk in exchange for fat dividend checks and a shot at the stock continuing to appreciate as the puzzle pieces slide into place may have the savory opportunity of cashing in through both healthy income and capital appreciation.