Investors love stocks that consistently beat the Street without getting ahead of their fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with robust and improving financial metrics that support strong price growth. Does CenturyLink, (LUMN) fit the bill? Let's take a look at what its recent results tell us about its potential for future gains.
What we're looking for
The graphs you're about to see tell CenturyLink's story, and we'll be grading the quality of that story in several ways:
- Growth: Are profits, margins, and free cash flow all increasing?
- Valuation: Is share price growing in line with earnings per share?
- Opportunities: Is return on equity increasing while debt to equity declines?
- Dividends: Are dividends consistently growing in a sustainable way?
What the numbers tell you
Now, let's take a look at CenturyLink's key statistics:
CTL Total Return Price data. Source: YCharts.
|
Passing Criteria |
3-Year* Change |
Grade |
|---|---|---|
|
Revenue growth > 30% |
156.9% |
Pass |
|
Improving profit margin |
(110%) |
Fail |
|
Free cash flow growth > Net income growth |
112.6% vs. (125%) |
Pass |
|
Improving EPS |
(114%) |
Fail |
|
Stock growth (+ 15%) < EPS growth |
(5.5%) vs. (114%) |
Fail |
Source: YCharts. * Period begins at end of Q4 2010.
CTL Return on Equity (TTM) data. Source: YCharts.
|
Passing Criteria |
3-Year* Change |
Grade |
|---|---|---|
|
Improving return on equity |
(113%) |
Fail |
|
Declining debt to equity |
60.5% |
Fail |
|
Dividend growth > 25% |
(25.5%) |
Fail |
|
Free cash flow payout ratio < 50% |
51.8% |
Fail |
Source: YCharts. * Period begins at end of Q4 2010.
How we got here and where we're going
CenturyLink's score hasn't changed since its first assessment last year. The regional telecom picked up the same two of nine possible passing grades, on the same criteria, on its second assessment as it did on its first. The company's profit margin and earnings per share have both shriveled further than they had last year due to persistent landline losses over the last few years. Shareholders also endured a painful but necessary dividend cut last year as well, which has caused a sell-off in dividend-heavy CenturyLink's shares. Will CenturyLink be able to reclaim a position of strength this year? Let's dig a little deeper to find out.
CenturyLink recently reported market-topping revenue and earnings per share for its fourth quarter, which came despite a decline in voice-line losses that were nevertheless less steep than that of many of its peers. Fellow Fool Chad Henage notes that the company outperformed telecom powerhouses Verizon (VZ 2.85%) and AT&T (T 1.17%) in terms of revenue growth and operating margin during what's generally been a difficult time for the global telecom industry. CenturyLink's also generated a shade under $2.5 billion in free cash flow over the trailing 12 months, but its free cash flow payout ratio remains rather high after shelling out about $1.3 billion in shareholder distributions last year.
The company does expect between $2.6 billion and $2.8 billion in core free cash flow in 2014, which should help maintain sustainable dividend payments with a yield similar to last year's levels. It's also worth noting that CenturyLink's dividend cut brought its free cash flow payout ratio to a level roughly in line with that of its two megacap peers and well beneath that of some other high-yielding telecoms:
CTL Cash Dividend Payout Ratio (TTM) data.Source: YCharts.
CenturyLink's solid dividend yield of 6.2% makes it an attractive buy for income-focused investors, but Windstream's (WINMQ) double-digit yield is by far the sector's highest. However, CenturyLink sports a debt-to-equity ratio of just 1.2, while Windstream's is nearly 10 times as high, which makes the higher-yielder a much higher-risk stock for investors concerned with the stability of their payouts.
Foolish writer Daniel Kline notes that CenturyLink added more than 9,000 subscribers for its PrismTV service, which augment what's now a customer base of 175,000. CenturyLink's TV subscriber base should continue to grow as more consumers become fed up with the high prices and low flexibility offered by cable TV. According to SNL Kagan, the U.S. multichannel TV (which includes cable, satellite, and telecom-provided TV service) industry lost subscribers for the first time on a full-year basis in 2013 to finish up with approximately 100 million aggregate subscribers. With landlines on the wane, TV subscriber growth might be one of the few remaining bright spots for a regional telecom without a mobile presence.
Putting the pieces together
Today, CenturyLink has few of the qualities that make up a great stock, but no stock is truly perfect. Digging deeper can help you uncover the answers you need to make a great buy -- or to stay away from a stock that's going nowhere.
