This High Yielding Telecom Company Has Good Growth Prospects

Piyush is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

A company with consistent cash flow and stable dividend payouts usually makes it to most of the income portfolios. It earns a reputation of sustainable payouts, and the Street loves the company for it. But when the same company announces a dividend cut, the Street punishes it severely. Such has been the case with CenturyLink (NYSE: CTL), which witnessed a 23% plunge in its share price shortly after management announced a dividend cut of 26%. In my opinion, this crash presents a buying opportunity.

Why not its peers?

Windstream (NASDAQ: WIN), a telecom service provider, also looks ripe for a dividend cut. At the current price, its shares yield a hefty 12.67% with a massive payout ratio of 281.13%. The company has an image of consistently paying out dividends, and to maintain its reputation, Windstream has been borrowing cash.

But in the process, its debt/equity ratio has deteriorated to 879, due to which most credit rating firms have a junk rating for the company. As a result, Windstream doesn’t have access to cheap credit to sustain its dividend, which definitely calls for a dividend cut. As of now, Windstream’s total long term debt stands at $8.1 billion, which has risen by 51% over the last five years.

Verizon (NYSE: VZ) is another popular telecom company which offers a lucrative yield of 4.1%. The company generated $33.06 billion in TTM operating cash flow and has $5.47 billion in cash and cash equivalents. With cash flow coverage of 5.61x, Verizon seems very much capable of sustaining its hefty payout ratio of 511%. But at the current price, its shares are trading at ridiculously high valuations with a P/E of 125x.

With that in mind, I think CenturyLink seems to offer more value. It sports a dividend yield of 6.1% with a slightly better (but not great) payout ratio of 194%. With a cash coverage ratio of 4.45x and free cash flow yield of 13.44%, the company can comfortably sustain its annual dividend payout of $1.3 billion. Besides that, its shares appear to be fairly valued with a forward P/E of 12.74x thanks to its recent crash.

Investors' delight

But shares of CenturyLink have appreciated around 18% since the crash in February. This was because the company had slashed its dividends, citing that it needs to repurchase its shares. And during the month of May, the company aggressively repurchased 3% of its total shares outstanding.

CenturyLink currently has a $2 billion worth of share buyback program underway, which should be executed by February 2015. On being asked about the pace of the buyback program, its management stated “we will potentially spend more than half of the program in 2013.”

This leaves around $400 million for this year’s repurchases, which accounts to a pending share repurchase of 1.8% of its shares outstanding (at the current market price). Apart from highlighting the faith and confidence of the board, these repurchases reduce the dividend burden on a company.

Growth prospects

During the recent quarter, CenturyLink added 67,000 new broadband subscribers which took its customer base to 5.91 million. This was amid the slowing PC sales, which corroborates the fact the easy availability of Full HD content is driving up bandwidth requirements.

Although mobile networks also provide 3G and 4G services, their exorbitant pricing structure makes it economically unviable to stream and download high resolution content. Now that Ultra HD is making an entry, it would be safe to expect a steady increase in high speed broadband users.

Its Prism TV is also growing at an impressive rate. The company added 13,400 new subscribers during Q1, which took its overall subscriber base to 120,000 (a 12.5% addition).

Talking about its data centers, CenturyLink added 15,000 sq. ft. in its saleable area during Q1. Additionally, the company is also planning to launch 10 new data centers in different metropolitan cities, which collectively add around 90,000 sq. ft in total area. That combined with its expansion during Q1 takes its total area increase to around 105,000 sq. ft. (for entire 2013).

Final words

The company already owns 2.4 million sq. ft. of data center space, and its expansion would increase its existing space by around 4.3%. With that in mind, I think CenturyLink has been beaten down perhaps a bit too much. It has ample growth prospects and carries a hefty yield with possibly $400 million worth of pending share repurchases for 2013.

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Piyush Arora has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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