It's difficult to find a high-yielding stock that investors can trust today. Between telecommunications companies, financials, and REITs, there are plenty of examples of dividends being cut and investors have become gun-shy of big payouts. In the local telecom sector, both Frontier Communications and CenturyLink (LUMN 0.74%) have been forced to cut their payouts, but for seemingly different reasons. The good news for CenturyLink investors is, their company is outperforming many of its peers and its roughly 7% yield looks safe for now.
This is a good habit for the company to get into
Just a few days prior to CenturyLink reporting earnings, I suggested that investors look for three things from the company's earnings. First, CenturyLink needed to continue limiting its revenue decline. Second, the company needed to limit voice-line losses. Third, it needed to make sure that the company's payout ratio stayed low to support the idea that the already lowered dividend was safe.
Not only did CenturyLink accomplish all three of these items, but when it comes to the company's revenue decline, the number was better than expected. In the previous quarter, CenturyLink's revenue decline of 1.1% was better than several of its peers. The last time around, the company improved even further, reporting a revenue decline of less than 1%.
Compared to Windstream Holdings' (WINMQ) last-reported revenue decline of 3%, or the 1.5% decline in wireline revenue at Verizon (VZ 0.76%), it seems clear that CenturyLink is outperforming its peers. In the tough business of offsetting voice-line losses with gains in other services, sometimes less of a decline is a reason to warm up to a stock.
Stable margins in an unstable environment
CenturyLink also has a strong operating margin. In theory, a company with a better operating margin than its peers has a little extra leeway if times get tough.
In fact, of the largest telecom players, Frontier Communications seems to be the only one with a better operating margin -- nearly 21% -- in the most recent quarter. CenturyLink's operating margin of nearly 14.8% came in slightly higher than Windstream at 14.6%, and significantly better than either AT&T at 10% or Verizon at less than 2%.
With CenturyLink reporting a margin that beats four of the five best-known names in the business, investors have good reason to believe the company can do well in the future.
The most important number of all?
The third and maybe most important reason investors should consider CenturyLink is its current and projected free cash flow. In the last 12 months, the company generated just under $2.5 billion in core free cash flow. With $1.3 billion in dividend payments, CenturyLink's core free cash flow payout ratio comes in at 53%.
Windstream is the poster child for a potentially troubled dividend, with a payout ratio in the last nine months of more than 97%. In addition, though Verizon produces significantly more free cash flow than CenturyLink, the comparison is a bit unfair, as the company also operates a massive wireless business that generates massive cash flow. In addition, Verizon's payout ratio of just 25% is also giving investors a yield of 4.5% compared to 7% at CenturyLink.
The even-better news is that CenturyLink is projecting free cash flow in 2014 of between $2.6 billion and $2.8 billion. If the company is able to pull this off, it could represent an increase of between 4% and 12% over CenturyLink's core free cash flow for 2013.
Though CenturyLink investors have already suffered a dividend cut, the company actually has returned more in total to shareholders by paying the current dividend and retiring 6% of the company's diluted share count. While Windstream pays a better yield, the company is on far less firm financial footing.
Clearly, some investors would favor Verizon over CenturyLink, but that is sort of like favoring an apple over a steak. Verizon is a play on the wireless business, with a side of wireline business thrown in. There is nothing wrong with Verizon and its 4.5% yield, but for income-hungry investors, CenturyLink's 7% yield should look tempting.
The company is doing everything it can to reassure investors that its current yield is sustainable, and the numbers prove it. If you're considering a high-yield play for your portfolio, it might be time to link up with this local telecom.