CenturyLink's Growing Pains In 2012
Christopher is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
In 2008, CenturyTel possessed roughly $8.2 billion in assets and carried $3.2 billion in debt as part of a total of $5 billion in liabilities. From 2008 to 2011, CenturyTel gained a new name and almost $50 billion in assets, with a total of $56.7 billion. CenturyLink also gained $30 billion in liabilities to sit at a total liability of $34.8 billion, which is seven times what it held in liabilities only three years earlier. The series of acquisitions that this telecom underwent no doubt positioned the company with an entrance into new markets and strengthened its position in the United States telecom industry, but CenturyLink also carries with it all the excess baggage carried by the companies that it acquired.
On paper, CenturyLink looks like a great investment. The company now provides telephone service to 15 million lines, serves another 5.4 million lines with high speed internet and owns a fiber optic network that covers 190,000 route miles, making it a new player in cable television. The acquisition of Savvis gave CenturyLink another 32 global data centers in addition to the 16 it already possessed and the company has seen an increase in revenue from $2.5 billion in 2008 to $4.5 billion per quarter in the last two quarters it has reported on in 2011. Revenue is certainly not a problem for CenturyLink; but profit is.
Despite the additional customers, assets, revenue and prestige, CenturyLink is beginning to produce less profit after its most recent acquisition than before. The Savvis merger alone moved CenturyLink from $22 billion in assets to $56.7 billion, but it is only producing an average profit of $150 million per quarter, which is a drop when compared to its near $1 billion profit in 2010. CenturyLink’s higher revenue has been disproportionate to the cost required to obtain it and its acquisitions are actually costing the telecom money.
When taking a closer look at CenturyLink’s assets we also begin to see how much of a paper tiger the company is. Of its $56.7 billion in assets, over $21 billion are from goodwill and another $12 billion are in other intangible assets, making the book value of this company after the subtraction of intangible assets $-11.6 billion. This makes me believe that CenturyLink will soon have a hard time supporting its dividend and I believe that it has already reached this point.
Over the past four quarters, CenturyLink has paid out at $0.72 per share to provide a yield just a little short of 8% but its payout ratio has been 3.15, which is an indication that it has been paying out over three times what it has been earning. This type of practice can be sustained if a company has a nice war chest, but even then, it can only be kept up for so long before the dividend needs to be cut. With profits headed in the wrong direction, a pile of new debt and increased costs of doing business all presenting themselves as strikes against CenturyLink, I think that we will see some form of change in 2012.
I think that CenturyLink simply grew too fast and must now handle the pains that accompany its growth. Its fiber optic network provides a moat against its declining landline service, but its declining profits could be the result of consumers making moves away from traditional landline telephone service into the mobile market. Competitors like AT&T (NYSE: T) and Verizon (NYSE: VZ) are dominant forces in the mobile market, while also offering landline service. These competitors are supported heavily by other income streams such as high speed internet and cable offerings, while CenturyLink's position in these markets simply hasn’t provided it with enough profitability to cover its losses from the landline service.
While CenturyLink has compared very well to the other high yielding dividend stocks in the telecom sector, I don’t believe that its dividend can be trusted for too much longer. I do not believe the dividend will go away in its entirety, but I definitely imagine that it will take a severe cut by the end of 2012. If you are looking for a yield of 8%, you will soon need to look somewhere else.
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