Many investors choose AT&T (T +0.04%) and Verizon (VZ 0.69%), the two largest wireless carriers in the U.S., as their top telecom stocks -- they pay big dividends, trade at low multiples, and have wide moats. Other telecom companies, like CenturyLink (CTL +0.68%) and T-Mobile (TMUS 1.18%), generally get less attention.
CenturyLink doesn't own a wireless business, but it became one of the world's largest wireline providers after its acquisition of Level 3 Communications two years ago. However, it lost about two-thirds of its market value over the past five years as its commercial and enterprise revenues declined.
Image source: Getty Images.
T-Mobile, the third largest wireless carrier in the U.S., doesn't own a wireline business. Its majority owner Deutsche Telekom is trying to merge it with Sprint (S +0.00%), the fourth largest wireless carrier in the U.S., but the deal remains in limbo due to a lawsuit from multiple state attorneys general. All that merger buzz, along with T-Mobile's stable growth, caused the stock to nearly triple over the past five years.
T-Mobile has clearly been a better investment than CenturyLink, but will that trend continue? Let's take a closer look at both companies to decide.
Which company is growing faster?
CenturyLink and T-Mobile's customer bases aren't directly comparable, since they serve different markets. But in terms of revenue growth, T-Mobile is clearly the stronger company.
|
YOY revenue growth |
Q3 2018 |
Q4 2018 |
Q1 2019 |
Q2 2019 |
Q3 2019 |
|---|---|---|---|---|---|
|
CenturyLink |
(4%) |
(4%) |
(5%) |
(5%) |
(4%) |
|
T-Mobile |
8% |
6% |
6% |
4% |
2% |
Source: Company quarterly reports. YOY = Year-over-year.
CenturyLink is struggling with the sluggish growth of the wireline market. Its acquisition of Level 3 reduced the weight of its consumer business to just 25% of its revenue and expanded its overseas presence, but macro challenges and poor pricing power are throttling its growth.
Meanwhile, T-Mobile continued to grow amid tough competition from AT&T and Verizon, thanks to 26 straight quarters of over a million net customer additions. It continued to gain customers with competitive prices and attractive perks like data-free video streaming. However, investors should note that CEO John Legere -- who spearheaded those strategies and the company's proposed merger with Sprint -- will step down in May 2020.
Analysts expect CenturyLink's revenue to decline 5% this year and drop another 3% next year. T-Mobile's revenue is expected to rise 4% this year and 5% next year, but those figures could be revised upwards if the Sprint merger is approved.
Dividends and profitability
CenturyLink cut its dividend earlier this year, but it still pays a whopping forward yield of 7.6%. T-Mobile doesn't pay a dividend.
CenturyLink's new dividend is easily sustainable, since it only used 44% of its free cash flow (FCF) over the past 12 months. However, investors' gains from those dividends were wiped out by the stock's 12% decline during the same period.
Moreover, its FCF fell 16% annually last quarter, indicating that its cash dividend payout ratio will continue rising. CenturyLink's debt-to-equity ratio is also much higher than T-Mobile's, due to recent acquisitions like Level 3, and extinguishing debt usually takes precedence over paying dividends.
CenturyLink and T-Mobile are both consistently profitable. At first glance, both companies' earnings growth seems to be decelerating -- but that's mainly due to year-over-year distortions caused by tax reform measures in 2018.
|
YOY EPS growth |
Q3 2018** |
Q4 2018** |
Q1 2019 |
Q2 2019 |
Q3 2019 |
|---|---|---|---|---|---|
|
CenturyLink* |
67% |
(65%) |
36% |
31% |
3% |
|
T-Mobile |
48% |
(76%) |
36% |
18% |
9% |
YOY = Year-over-year. Source: *Excludes certain integration expenses. **Impacted by tax reform.
Looking ahead, analysts expect CenturyLink's earnings to rise 11% this year and 9% next year as it continues to cut costs and pivot away from lower-margin equipment sales. Analysts expect T-Mobile's earnings to grow 19% this year and 20% next year, even as it matches AT&T and Verizon's prices.
The valuations and verdict
CenturyLink's forward P/E ratio of nine is much lower than T-Mobile's forward P/E of 16. However, that discount is arguably justified by its sluggish revenue growth, higher debt, and dependence on cost-cutting measures to drive its bottom line growth.
Meanwhile, T-Mobile remains a solid investment, regardless of what happens with Sprint. In short, investors who value a stock's potential price appreciation over steady dividends should buy T-Mobile instead of CenturyLink. Investors who care about dividends should stick with AT&T and Verizon instead.
