Published:
October 27, 2008
Formed in 1968, CenturyTel (NYSE:
CTL, $29.50) has grown through a
series of acquisitions to become the
country's seventh-largest local
phone company. It provides
fixed-line phone services and
high-speed Internet to rural areas
in 25 states. Operations are
concentrated in Wisconsin, Missouri,
Alabama, and Arkansas.
About 65% of revenue comes from
local and long-distance telephone
services, including network access
fees charged to other telecom firms
that use CenturyTel's lines. The
company also offers satellite TV
services in partnership with
EchoStar Communications (Nasdaq:
SATS) and high-speed Internet
through fiber-optic networks.
It is the dominant telecom carrier
in its markets, servicing 85% of the
households in its areas with local
fixed-line phone service, 60% with
long-distance services, and 29% with
high-speed DSL Internet access.
Dividend: In June
2008, management revised the
company's dividend policy. It now
intends to return virtually all free
cash flow to shareholders in the
form of dividend payouts and share
buybacks.
In line with this stated policy,
management dramatically upped the
annual dividend rate to reflect the
company's growing cash flow. After
paying out $0.068 per share in the
first two quarters of this year --
up from $0.065 quarterly payment per
share in 2007 -- management said it
will pay a robust $2.80 per share
over the coming four quarters.
That represents an astounding +937%
leap from a formerly projected $0.27
a share. The company has so far made
good on its word, paying out a $0.70
per share in September for the
third-quarter dividend. The stock
now carries a rich 9.5% yield at
today's price ($2.80/$29.50).
The dividend boost is not entirely
out of line with the company's
strong dividend track record.
CenturyTel has paid dividends at an
increasing rate since 1973. The
company has hiked the dividend every
single year, raising it at a 10-year
average rate of +4.7% annually. As
the company's website boasts, "The
year 2008 marks CenturyTel's 35th
consecutive year to increase common
dividends." The payments are taxable
as ordinary income, so the stock is
best held in a tax-deferred IRA type
of account.
Even with the increase, management
said the new dividend rate
represents just 52% of estimated
free cash flow in 2008.
Management also said it plans to
distribute the balance of free cash
flow through an accelerated share
buyback program; however, we
anticipate they may reconsider the
repurchase program unless the
capital markets substantially
unthaw.
CenturyTel offers a dividend
reinvestment plan that allows
investors to automatically use their
cash dividends to purchase
additional shares on the dividend
payment date. You can contact
Investor Relations at 800-833-1188.
Performance: How can this S&P 500 member
company afford to raise the dividend
by such a huge amount when other
companies are slashing theirs? A
look at its strong operating
performance tells us the answer. The
company has grown per-share earnings
an average of +15.6% a year for the
past three years through 2007, and
per-share cash flow by an average
+12.7% a year over the same stretch.
It's achieved much of this growth by
acquisitions, which have added
telephone access lines to
underserved rural markets. Many of
the companies purchased already have
fiber-optic networks in place. The
acquisitions have enabled CenturyTel
to replace its older copper networks
with more efficient high-speed
fiber-optic networks that, in turn,
allow it to enhance its service
offerings.
Last year, the company completed an
$830 million purchase of Madison
River Communications, a private,
North Carolina-based telecom firm.
That added a 2,400-mile fiber
network, 164,000 local phone
customers and 57,000 high-speed
Internet customers in four states.
As with most phone companies, the
fixed-line phone business is on the
wane, losing about -6% of its
customer base each year to cable and
cellular providers. Offsetting these
losses, the company has been
increasing revenue per customer by
adding high-speed Internet access
and broadband TV service.
In the latest quarter, for instance,
a -5.8% loss of customer phone lines
led to $21 million in lost revenue.
That loss, however, was more than
offset by a +21.4% gain in
high-speed Internet customers, which
contributed $43 million in added
revenue. As a result, total revenue
increased about $18 million or
+2.8%.
A series of share buyback programs
has helped boost earnings per share
by reducing the outstanding shares.
Since early 2004, the company
returned approximately $2.6 billion
to shareholders through share
repurchases and dividends.
Repurchases reduced the share count
by -13% in 2006 and -7% in 2007.
Outlook: Earnings are expected to grow +6% this
year to $3.35 a share and about +6%
annually over the next five years.
The company is focused on expanding
its high-speed offerings by
extending its fiber network and
applying new technology that allows
faster data and video transmission
speeds. It has also been buying
wireless spectrum and plans to
introduce wireless service in 2010.
Revenues are modestly dependent on
changing government funding policies
-- about 13% of revenues last year
came from the Universal Service Fund
and other government support
programs.
Even with the acquisition of Madison
River, CenturyTel's debt is less
than 50% of its total
capitalization. Its leverage, as
measured by the debt-to-cash flow
ratio was just 2.35 as of the end of
the latest quarter. Going forward,
the company plans to increase that
leverage to a still reasonable 2.75
times to maximize its cash flow.
With a debt-to-equity ratio of less
than one and annual cash flow of
around $900 million, the company
should have the financial
flexibility to support its future
growth.
CenturyTel has a rich yield backed by
strong earnings and cash flow.
Management's commitment to pay out
its free cash flow in dividends and
share buybacks that will benefit
shareholders makes this a solid
income play for a reasonably
risk-averse investor. The shares are
trading close to their 52-week low
of $28.86, providing an opportunity
for investors to lock in a
historically high yield. (Yield and
share price move inversely). Despite
the company's strong financial
position, the shares are not immune
to the gyrations of the broader
market. As such, investors should be
prepared to hold the shares through
any potential volatility.
Carla Pasternak
Editor
High-Yield
Investing
About High-Yield Investing
High-Yield Investing is
a monthly investment newsletter that brings you a wealth of information on the
market's leading income stocks and funds, as well as a host of relatively
unknown investment options that you probably won't find coverage of anywhere
else. Many
of these securities provide investors with annual dividend yields of 10%, 15%,
even 20% or more. The newsletter not only provides subscribers with
investing ideas that produce incredibly high dividend yields, but the kicker is
that these high-yield investments have also consistently outperformed the major
market averages. (Learn
More)
About Carla Pasternak
Editor of StreetAuthority.com's High-Yield Investing newsletter since its
inception in May 2004, Carla Pasternak draws on a variety of financial
backgrounds to make profitable calls on income-generating stocks for her
readers.
Carla has been employed in the investment industry for more than two decades.
In addition to her work as a writer for several nationally recognized financial
publishers, her previous experience includes a position as president of a
well-respected investor relations firm. She has also been writing shareholder
reports for public companies since 1980.
A highly successful investment analyst, Carla specializes in high-yield,
income-paying stocks. In that pursuit, she's always mindful to select companies
that not only pay rich dividends, but that also deliver strong long-term capital
gains. Furthermore, Carla's experience in writing SEC filings gives her the
added insight required for her to truly understand a company's current and
future financial health.
On the educational front, Carla holds BA, MA, MBA and Ph.D. degrees. When
she's not watching the market, she's teaching business courses at the college
level and managing millions of dollars in portfolio assets.
To learn more about Carla Pasternak's premium income investing newsletter -- High-Yield
Investing -- please visit
this link.
|
