These may be challenging times for independent local exchange carriers, but CenturyLink (NYSE:LUMN) is making the best of of its market's tricky situation. CenturyLink has been trying to break from the regional telco pack by making needle-moving acquisitions as it woos income investors with its chunky payouts.
CenturyLink's stock price has moved lower in each of the past three years -- it did close higher in 2016 on a dividend-adjusted basis -- but it's trading refreshingly higher in 2018. With the steady drum of sector consolidation drowning out the fears of legacy businesses, CenturyLink may not be as doomed as the fate of many of its lesser peers.
Making the right connection
Change is afoot at CenturyLink. Longtime CEO Glen Post will step down at next month's annual shareholder meeting, handing the reins to former Level 3 Communications CEO Jeff Storey. The succession plan was set in place shortly after CenturyLink completed its $25 billion acquisition for Level 3 Communications late last year, a transaction that helped beef up its presence in broadband services.
CenturyLink realizes that you have to eat or be eaten in this space to survive. Folks are kissing their landlines goodbye, and the push to make waves in the corporate market or push faster internet connections to consumers finds the regional players at a competitive disadvantage to the giants in this field. CenturyLink has responded by snapping up Embarq, Qwest, Tier3, and now Level 3.
The market seems to like Storey, having faith in CenturyLink's goal to score $850 million in operational synergies in the next three years. With business customers now accounting for roughly 75% of its core revenue, it makes sense to tap Storey as its new helmsman. Analysts see revenue soaring 35% this year, but that's the handiwork of the incremental sales provided by Level 3. Organic top-line growth will continue to be a problem, and Wall Street's bracing for profitability declining in 2018.
This brings us to one of the more appealing traits of CenturyLink to the market: its yield. It will be hard to justify its chunky quarterly distributions -- the stock is yielding 11.4% at the moment -- if it doesn't turn its bottom line around. Storey feels that CenturyLink can meet its dividend obligation, and the stock's ability to hold on to this year's gains may rely on that goal. CenturyLink hasn't cut its dividend since 2013, and its payout ratio has been north of 100% every year since 2010.
Risk-tolerant investors may want to stick to the sidelines, but growth investors with an appetite for taking chances may want to stick around to see how Storey's leadership plays out. The meaty quarterly dividends will be a consolation prize if things fall apart. It's ultimately hard to bet against CenturyLink, a company that may have been dealt a bad hand by the industry dynamics but it's playing its cards surprisingly well.