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Better Buy: CenturyLink, Inc. vs. AT&T

By Dan Caplinger - May 8, 2018 at 1:31PM

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Which telecom company is the smarter pick?

Telecom stocks have historically given investors a great combination of relative business stability and ample dividend income. CenturyLink (LUMN -1.78%) and AT&T (T -0.81%) are two very different companies in terms of the scope and breadth of their respective businesses, but they share the common goal of trying to serve their customers with the combination of voice, data, and video services that have become their bread-and-butter offerings.

Lately, the telecom industry has been a minefield, with some companies having had to reduce or eliminate their dividends in light of changing business conditions. Concerned investors want to know whether CenturyLink or AT&T are still worthy of consideration as solid prospects for the foreseeable future. Let's look at several key factors to get a better sense of whether you'd like either of these stocks as part of your investment portfolio.

Logo of myAT&T.

Image source: AT&T.

Valuation and stock performance

Neither CenturyLink nor AT&T has done at all well over the past 12 months. AT&T is down 18% since May 2017, but that's actually slightly better than the 24% share-price drop that CenturyLink has suffered over the same period. The disparity is narrower when you take dividends into account, but AT&T still has a slight edge.

Even though it's held up slightly better than its smaller rival, AT&T also has the more attractive valuation when you look at simple earnings-based measures. The telecom giant's trailing earnings multiple is less than seven, compared to CenturyLink's shares that trade at more than eight times trailing earnings. Those factors are slightly distorted by tax reform impacts, but when you look at near-term predictions, forward multiples give AT&T the same edge, coming in at nine times forward earnings compared to a 16 forward multiple for CenturyLink. That makes AT&T the winner on this metric.

Dividends

Both CenturyLink and AT&T have had strong dividends, but in terms of current yield, CenturyLink takes the prize hands-down. The smaller telecom currently yields almost 11%. AT&T comes in at just over half that number, yielding 6% right now.

In terms of reliability, though, the two stocks behave differently. AT&T regularly gives shareholders modest dividend increases over time, including its most recent boost of 2% back in January. That extended the company's streak of annual dividend boosts to 34 straight years. By contrast, CenturyLink chose to cut its dividend by about 25% back in 2013, and many investors fear that the smaller telecom is getting overextended in terms of how much of its capital it pays out to investors through dividends. Even a sizable cut could still leave CenturyLink with a larger yield, but those who prefer less uncertainty might see AT&T as the safer play for long-term dividend growth despite the current yield disadvantage.

Growth prospects and risk

Both CenturyLink and AT&T have good prospects for growth but face a lot of competition. For CenturyLink, the challenges of being a smaller local carrier led the company to make a huge strategic shift, merging with Level 3 Communications in a $25 billion deal and giving control of the post-merger CenturyLink to Level 3 CEO Jeff Storey effective later this month. The move will further cement the telecom's decision to focus primarily on business customers, a move that cuts down on some of the cord-cutting behavior that more consumer-focused telecoms have had to deal with lately. Potential synergies between Level 3 and CenturyLink could bring hundreds of millions of dollars in savings over time, but the bigger question is whether the combined entity can keep up with larger competitors and offer the high-demand broadband services more profitably even as other parts of its business might continue to shrink.

AT&T is a leading wireless telecom provider nationally, and that business has been part of a price war for years. The hopes for a merger between two of the company's biggest rivals could help reduce some of that competitive pressure, but until that happens, the need to offer discounts and attractive plan options has put pressure on AT&T's ability to maximize revenue and profit. Bundling broadband and video with phone service has been a winning proposition for AT&T despite the resulting downward impact on margin, but as 5G network infrastructure rolls out, the telecom giant will have to spend billions to keep up with its major rivals.

Going with the tried-and-true

At this point, AT&T looks like the better buy despite its lower dividend yield, with a better history of payout growth and a valuation that gives investors a margin of safety. CenturyLink has the opportunity to hit a home run if its Level 3 integration works well, but dangers abound that could outweigh the potential rewards from CenturyLink's overall business strategy.

Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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Stocks Mentioned

AT&T Inc. Stock Quote
AT&T Inc.
T
$18.42 (-0.81%) $0.15
Lumen Technologies Stock Quote
Lumen Technologies
LUMN
$11.06 (-1.78%) $0.20

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