Wolf's Stock Pick for March 7, 2016 - Centurylink (CTL)

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

Or 17.5 Billion....

As the third-largest telecomm in the US, you would assume that CenturyLink has captured a large share of the market - and you'd be correct.  Accordingly to Yahoo Financial, CenturyLink has a market cap of $17.5 Billion dollars.  That's huge - this is not a company that is going to go away quickly, if ever.  For smaller companies, a bad year or some bad decisions can irreparably damage the company, even lead to failure.  Larger companies have a lot more leeway - and while CenturyLink doesn't have the $234 Billion market cap of AT&T, or the $210 Billion market cap of Verizon, it's not by any means a "small" company.


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.

---------------------------------------------------------------------------------------------------------

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.

Utility Stocks - slow and steady growth as well as retirement income: these aren't just your father's investments

This week I'm going to talk about Utility stocks.  Let's start by defining what exactly a Utility stock is.  According to Dictionary.com, a utility is:

...a public service, as a telephone or electric-light system, a streetcar or railroad line, or the like...

So a Utility stock, then, is stock in a company that is considered a public service - like the phone companies, or companies that generate electricity or provides natural gas.

Nuclear Power Plant in Dukovany.  From https://upload.wikimedia.org/wikipedia/commons/d/d3/Nuclear.power.plant.Dukovany.jpg

That definition of a Utility is just fine, really.  For probably the last 100 years folks like Warren Buffet and my Dad have made good money investing in Utility stocks and reinvesting the dividends.  Because, you see, that's what makes a Utility stock so appealing - most of them make a nice, regular profit - they're selling something that people always have to have, regardless of the state of the economy - and they pass a nice chunk of that back to their investors.  It's not at all uncommon to make anywhere from 5-8% profit per year from an investment in a Utility company.

My Dad started out buy investing in just one company - Southern Company (SO), which produces electricity for much of the South.  He was lucky in that Southern Company did well, but as soon as I knew a bit about investing and realized what he was doing, I convinced him to diversify into other stocks.  Since my father is retired, he wanted to stick with dividend income - and since he already believed in utilities, I convinced him to go for other energy companies.  Let's take a look at some of the holdings that he (and I) own:

Stock	Current Price	Dividend	Yield
CTL	30.11	0.54/share	7.10%
DUK	74.13	0.82/share	4.30%
FTR	5.43	0.10/share	7.90%
KMI	17.77	0.125/share	2.80%
SO	48.33	0.54/share	4.40%
T	37.09	0.48/share	5.10%
VZ	51.02	0.56/share	4.40%

In my opinion, telecomms are really the new "power utility".  In 2007, with the advent of the iPhone, cellular phones took a quantum leap forwards in terms of functionality and data consumption - which in turn propelled cellular stocks upwards.  They've become another one of those things we can't do without - look around you and you'll see that even folks who have less disposable income are constantly staring into their smartphone screen.  Another reason to love the telecomms - many of the companies that are considered telecomms also form the backbone of the internet - companies like CenturyLink (CTL), AT&T (T), Sprint (S), and Verizon (VZ) make quite a bit of their money by routing data for businesses as well as consumers.  And I'm pretty sure this here internet thing is here to stay.

Now, if you recall from my earlier blog post, dividend investing is the slow but sure way to make a ton of money.  So why wouldn't you just stick all of your money into the utility company with the highest yield?   Several reasons:

Some stocks pay a stupidly high dividend because they are desperate to get investors - never a good sign.  If you take a look at Dividend.com you'll find companies paying as much as 20% dividend yield - mostly real estate investment trusts.  My advice is to stay well clear of them if you value your money.

All of the stocks in the above table pay a high dividend, but aren't classified as honey traps - they have been around for a long time and have paid a dividend more or less consistently for years (decades in most cases).

Additionally, you really have to diversify - you can't put all your eggs in one basket, because if that basket breaks, you lose your eggs.  Same thing here.  I love Frontier Telecommunications (FTR), with it's high dividend and low entry price per share, but it's a smaller company - it's been around for a long time (I've been making money from it for a decade), so I feel like it's stable enough, but with a smaller customer base (they serve the rural markets that the bigger providers can't be bothered with) and smaller total market cap, it's definitely less secure than a company like AT&T (T), which is essentially "too big to fail".  Bear in mind that while each of these companies offers a service that we "have to have", we don't have to have it from any one particular company.

The idea of diversification can - and should - also be applied to each market sector (such as utilities) you invest in as well - don't put all of your money into power companies, for example - add telecomms to the mix.  One good reason for this is that, every few generations, there is a paradigm shift - a major change in the way the system of our world works, and that can drastically impact the companies that do business the "old" way.  For example - we've been generating electricity pretty much the same way forever - we use a fuel that heats water that turns into steam that turns a turbine that drives a dynamo that generates electricity.

From
http://www.engineeringexpert.net/Engineering-Expert-Witness-Blog/tag/thermodynamics

It doesn't matter if you are talking about a coal-fired plant, a gas burning plant, or a nuclear power plant - they all essentially do the same thing:  heat water until you get steam, then use that to drive a generator.  Even if we succeed in getting nuclear fusion reactors operational, they'll still just be used to heat water - nothing as exotic as a electro-plasma conduit that generates power using unexplained technobabble is anywhere in our near future.  And that pretty much means that there will always be a large, central power-generating plant, owned by a utility company that we can invest in - right?

Not necessarily - there are disruptive technologies being worked on that could change all of that.  What if you could generate all the electricity you needed locally - say, in your home - instead of having to have a central generator that then distributes power everywhere?  Think of all the infrastructure we wouldn't have to build or maintain - no more wires or transformers!  Solar and Wind power are the first things people think of when they think about getting off the grid, but there's another option that's coming along fast - fuel cells.

http://www.bloomenergy.com

Bloom Energy is betting big that their Bloom Energy Server - a large array of efficient fuel cells taht generate electricity on-demand - will become an option to central power generation and distribution.  Their systems are already being used by several large name companies, including Apple, eBay, Google, FedEx, and Macy's.  In theory, this sort of appliance could live in your basement, next to your furnace and water heater, and produce all the power you need to run your home.  If this idea takes off, the traditional utility companies may start to die off.  Granted, it will take years - decades, really - if it ever happens, but it's important to realize that nothing is forever.

So how can you future-proof your investments against such disruptive paradigm shifts?  It's not always easy to see paradigm shifts coming, so you have to pay attention.  Spend some time every day, or week, or month, researching the things you invest in - and not just financial blogs, but the science and technology sites that affect that market sector.  And when you see a potential game changer like Bloom Energy, you keep it in your sights - maybe when the have their IPO you invest in them (as of this writing Bloom Energy is still privately held), or maybe you invest in companies that provide the fuel for the fuel cells (after all, they don't make electricity of of thin air - not yet, anyway).  Companies like Kinder Morgan (KMI), for example, who make their living moving fuel from one place to another via pipelines.  As an aside, Kinder Morgan has recently moved sharply lower - they had to drop their dividend payout temporarily, but they're still as profitable as ever - and I'm betting the dividend pops back up to it's previous 7% or so before too long.  They're one I'm going to stock up on as long as the price stays as low as it is.....

Next week I'll focus in one one utility stock in particular that I think is a worthy addition to your portfolio.  Until then, do some research on your own, and leave me a message if you think you find something interesting!

---------------------------------------------------------------------------------------------------------

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 Apple (APPL), Kinder Morgan (KMI), Frontier Telecommunications (FTR), Centurylink (CTL), Verizon (VZ), Southern Company (SO), Duke Energy (DUK) and AT&T (T) mentioned above.