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| Not a sponsor or an ad - but a company you might want to consider investing in.... |
Last week I talked about Utility stocks and how they can be a steady and reliable source of income through their typically high dividend yield. This week I'm going to discuss one specific utility company that I think should be part of your portfolio - CenturyLink (CTL). CenturyLink is a communications/data company providing telephony, internet access, and fiber television services to residential and business clients in 36 states in the US. According to Wikipedia, they are the third largest telecommunications provider in the United States, after AT&T (T) and Verizon (VZ).
When shopping around for utility stocks, there are several attributes to pay attention to. The size of the company (and by this I mean market capitalization, which is a reflection of how much market share they have as well as their overall income), their dividend yield, and the consistency of dividend payout.
There are plenty of utility companies to choose from. One of the ways I use to screen potential investment companies is to look at Dividend.com and rank the companies by dividend yield. I usually stay away from the absurdly high dividend payers - see my article on dividend investing for why. In the 3% - 9% dividend yield range you'll find many different utilities - power companies, telecomms, etc. Towards the upper end of this is CenturyLink, which at $31 a share currently pays a 6.9% dividend. I also like Frontier Telecommunications (FTR), currently about $5.67 a share, for 7.5% dividend yield, as well as Verizon (VZ) and AT&T (T), both of which offer almost a 5% dividend yield. I own shares in all of them, in fact - but if you're just starting out with investing, I would recommend CenturyLink as a good entry point, and here's why:
Market Capitalization
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| Or 17.5 Billion.... |
Profitability
Looking at their annual report for 2015, CenturyLink made a profit of $434 million from net revenues of about $18 Billion. So while they have a very large revenue stream, and are in fact profitable, their profit is only 2.5% of their total revenue. This doesn't seem huge, especially compared to AT&T's $75.59 Billion profit on revenue of $146.8 Billion (almost 50%). So this is a warning sign - while they are profitable, their overall profit margin is fairly low.
Debt
At first glance, CenturyLink would appear to have an extremely high amount of debt - approximately $20 Billion, according to their December 2015 Investor Relations page. That's more debt than their market cap, which might seem like a bad thing. It's important to remember that most telecomms are really cash flow machines - they continue bringing in a large revenue stream, and use loans they take out to expand that machine by building more infrastructure. So the high debt is a sign of CenturyLink's investment in future revenues. This is not at all uncommon - even the "big boys" (AT&T and Verizon) fund expansion by taking on huge debt, with the knowledge that their resulting increased revenue stream will make up for it in the long run. And compared to AT&T's $118 Billion debt and Verizon's $103 Billion debt, Centurylink's debt is absolutely paltry.
Dividend Yield
This is a no-brainer. CenturyLink, at $31 a share, pays 6.9%. And like all stocks, it's somewhat cyclical, so if follow it long enough you'll see the stock price dip far enough to bring that yield up to 8% (since the dividend is paid as dollars per share, not an actual percentage - you get more when the price goes down!). While Frontier Telecommunications offers a larger dividend, they can't beat CenturyLink's on any of the other criteria in this list.
Payout History
The Payout History is just what it sounds like - a history of dividend payouts a company has made in the past. The important thing here is to look for consistency - sometimes companies will "skip" a dividend payout, or even reduce their dividend, if they are experiencing financial difficulties. By looking at the payout history, you can see not only whether or not a company has consistently paid its dividend like clockwork, but you can also see whether or not that dividend changed (see below). The best place to look for this, IMHO, is (surprise!) Dividend.com's history section. As you can see if you click here, CenturyLink's payout history is superb - they haven't missed a dividend payment since 1993, which is as far back as their record goes at Dividend.com.
Dividend Increase
Another piece of information you can get from that Dividend.com history table for CTL is the change in dividend over their payout history. If you look at the data for CenturyLink, you'll see that their dividend has remained unchanged since February of 2013; immediately prior to that they actually reduced their dividend payout! Is that a warning sign? Not necessarily. Looking even further back you'll see that prior to that, they actually raised their dividend every year. The cut in 2012 was a blip - the dividend was cut so that they could reduce their debt, using the cash on hand for that rather than supporting the high dividend. That's a sign that management knows what they're doing, in my opinion. This is part of the game - there's always a risk that a company may reduce it's dividend; in the meantime, you are still enjoying one of the higher dividends available that's not in a dividend value trap.
While Verizon and AT&T are also good contenders in all of the above areas, CenturyLink's slightly higher percentage yield is what really tips them over the edge in my mind. Do the math and see how quickly a 6.9% yield outperforms a 5% yield with even a small investment of just $1000:
As you can see, that 1.9% makes a huge difference over time. The $1000 invested at 6.9% has doubled by year 11 - and in fact reached the same point that the 5% investment made in 12 years in just about 8 years. The stock price will fluctuate over time, so of course your overall profit will depend on when you sell - if you ever do. But the earnings you make - $1227 vs $795 - those don't change. As always I'd recommend reinvesting your dividends and holding on to the stock for the long haul, and only selling at one of the "peaks" in the stock market cycles....
The other thing to bear in mind here is that the dividend yield will change as the stock price changes (I explain this in my article on dividend investing). So keep an eye on the stock price and dividend yield of any stocks you are interested in buying as dividend earners - again, Dividend.com is a great asset here, but there are other tools you can also use that will make your life easier. I'll go in depth on some of those next week.
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Disclaimer - I am not a financial expert and I am not responsible for any losses - or gains - you may make if you make decisions based on the information posted here. If you do make money, please feel free to let me know!
Disclosure - Wolfgang Rumpf owns shares in Frontier Telecommunications (FTR), Centurylink (CTL), Verizon (VZ), and AT&T (T) mentioned above.
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