CenturyLink (NYSE:CTL) hasn’t had a good year in the markets. Down 32% year to date through May 24, CTL stock is trading perilously close to single digits.
CenturyLink stock closed 2018 at $15.15 ($14.84 when adjusted for dividends). The company cut its quarterly dividend in February by 54% from 54 cents to 25 cents a share. Investors weren’t expecting the timing of the cut sending the stock down by more than 10% on the news.
It’s never recovered.
That’s a good thing if you’re looking for a dividend value play that could deliver some great capital appreciation in the next 12-24 months.
Could it get back to $15 by the end of 2019? Sure. Here’s why.
It Keeps Beating Earnings
The wireless company came out with its first-quater 2019 results May 8 and they were a mixed bag.
CenturyLink reported revenues of $5.65 billion in the first quarter, 1.4% below the Zacks consensus estimate and 5% less than a year earlier. On the bottom line, it had adjusted earnings of 34 cents a share, 36% higher than in the previous year and 26% better than analyst expectations.
The company continues to focus on profitable growth rather than merely moving revenues higher, no matter the cost.
“Our focus on profitable revenue continues to drive our growth in Adjusted EBITDA and expanding our Adjusted EBITDA margin,” said CEO Jeff Storey. “We made solid progress this quarter with our transformation initiatives, which has the primary benefit of improving experience for our customers and employees, along with reducing costs in the business.”
As InvestorPlace contributor Chris Lau stated in April, CenturyLink is focused on reducing its overall debt so that it can make acquisitions over the next 3-5 years to reignite revenue growth.
In the meantime, CenturyLink continues to beat the analysts’ estimate for earnings per share. It’s done so for four consecutive quarters averaging a 20% beat over the past two quarters.
Given it continues to transform itself into a more profitable operation, it should deliver more free cash flow over time. Furthermore, because it cut its annual dividend by 54%, CenturyLink will be able to use those funds to pay down some debt.
Free Cash Flow Is Key
In the first quarter, CenturyLink generated $315 million in free cash flow, well down from $941 million a year earlier. However, it expects 2019 free cash flow to be at least $3.1 billion.
CenturyLink is currently exploring strategic alternatives for its consumer business, which includes the sale of the business, despite the fact it is making a meaningful contribution overall. While it has no problem operating the consumer business for the long-term, CenturyLink would be willing to part with the valuable asset if the right buyer came along.
That’s a work in progress.
In the meantime, the company will pay out $1.1 billion in dividends in 2019, leaving at least $2 billion for debt repayment. If CenturyLink can sell its consumer segment, which accounts for 26% of its overall revenue, CEO Jeff Storey should be able to reduce its long-term debt from $35 billion at the end of the first quarter.
From a valuation perspective, CenturyLink currently has an FCF yield of 6.7% based on $3.1 billion in free cash flow and an enterprise value of $46.2 billion. As it continues to transform its business into a more profitable enterprise, the FCF yield should continue to move higher, providing shareholders with more than just a higher dividend yield.
The Bottom Line on CTL Stock
If it wants to get to $15 in 2019, CTL stock must appreciate by 50% over the next seven months.
CenturyLink’s business hasn’t improved to the point where its stock is going to go on a significant run over the remainder of 2019. That said if you’re an aggressive investor, the 10% yield is a good rent check to receive until the company’s business does improve.
I wouldn’t put CenturyLink in a retirement account. However, if you can afford to lose it all, CTL stock is looking a lot more attractive today than from a value perspective than it did at the end of 2018.
At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
