CenturyLink (CTL) stock jumped 3% Wednesday after the company reported its third-quarter earnings beat analyst expectations and the company returned to revenue growth.
Looking ahead, CTL has become a stable business whose operating declines are no more, a high-yield stock and company that can more than afford its high yield of 7.5%.
That’s why CTL stock is perfect for income investors.
CenturyLink Earnings: What You Need to Know
There’s nothing flashy about CTL. It is one of the nation’s largest telecom companies, one that has suffered over the last few years with the declines in landline phone use.
However, CenturyLink has found growth in broadband internet and TV services, along with leasing its dark-fiber network. The result is a company whose revenue growth is expected to be flat this year after four years of core business declines.
CenturyLink earnings for Q3 showed revenue growth of nearly 1% at $4.55 billion. It added 11,300 PRISM TV subscribers, and revenue from high-bandwidth data services to business customers increased 7% year-over-year. But more importantly, free cash flow excluding special items totaled $747 million.
Why Own CTL Stock?
With that said, CenturyLink is not a company that’s going to grow revenue 50% without a major acquisition, and that means CTL stock probably isn’t going to be a top performer in the next year.
Instead, the big incentive to invest in CTL is CenturyLink’s dividend yield of 7.5%. However, the first rule for income investors when choosing a stock is to make sure that dividend is sustainable, and that there is dividend upside long-term.
In regards to sustainability, CTL’s operations are rather stable, as broadband internet and TV aren’t going anywhere, and landline subscribers who are still using CenturyLink services are mostly business customers that need the service. So, with a 54-cent quarterly dividend payout and 549 million shares outstanding, CenturyLink dividend costs the company about $300 million quarterly.
Therefore, CTL stock has a 7.5% yield, and to support that yield CenturyLink pays just 40% of free cash flow (FCF).
That may seem like a lot to retail investors, but income and dividend investors know that 40% of free cash flow for a yield of 7.5% is not much at all. It speaks volumes of the efficiency of CenturyLink’s business that it can generate that much cash from operations after capital expenditures.
With that said, CenturyLink earnings in Q3 were no exception for its FCF/dividend payout ratio. CTL earned $2.25 billion in FCF during the four quarters prior to Q3 while paying out just $1.2 billion in dividends. Still, CTL has paid the same quarterly dividend for the last two years, and with the stock falling 27% this year, not many investors expect an increase in its quarterly payout.
Bottom Line
CTL has a lot of room to hike its dividend, and with it being so long since investors have seen a change in dividend payout, there’s a good chance that the CenturyLink dividend will increase.
At the very least, the chances of CTL cutting its dividend are very low, and with the stock trading at less than seven times FCF with 76% institutional ownership, CTL stock is the perfect investment for income investors.
As of this writing, Brian Nichols owned shares of CenturyLink.
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