CenturyLink: 7.4% Dividend Stock Has New Growth Drivers

We reiterate our previous long stance on CenturyLink Inc. (CTL), which is based on its strong quarterly results and potential for future growth in the data center business. The company has successfully brought about a slowdown in its revenue erosion. Line loss trends are improving with strong growth coming from Prism TV and high-speed broadband, which will continue to be the growth drivers going forward. Moreover, its recent move into the data center and cloud computing business will help the company in offsetting the shrinking wire-line business and can be identified as another growth driver. High dividend yield of 7.4% is well supported by its forward free cash flow yield of 14% and the company is well on track to meet its free cash flow target for the year. Operating cash flows are on an incline as well, which further indicates the company's ability to sustain its payout.

The stock is currently trading near $39, 12% off its 52-week lows. Currently, 35% of sell side analysts have a strong buy rating on the stock, 39% issuing a buy rating and 26% recommend holding the stock. CTL is trading at 15 times its forward earnings, which is in line with the forward multiple of Verizon (15x). When compared to Equinix (EQIX), which is a leader in collocation and data center business, CTL looks undervalued. EQIX is trading at 56 times its forward earnings (high valuations for data centers in an industry norm because of high expected growth rates).
Based on sell side EPS estimates of $2.69 for the financial year 2012, we arrive at a target price of $41. The target price of $41 roughly translates into a capital return of 5% on the current share price, which, coupled with a dividend yield of 7.4%, brings the total expected return to 12.4%. Wireless substitution and further line losses remain key risks to our thesis. Read more