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Berko: CTL moving in right direction

By Malcolm Berko

Published: October 29, 2016, 6:00am

Dear Mr. Berko: I bought 300 shares of CenturyLink five years ago at $46. It hasn’t gotten that high since. My stockbroker recommends that I buy another 300 shares and reduce my basis to $37.50. Your opinion is requested.

— H.D., Buffalo, N.Y.

Dear H.D.: You may be asking the wrong person. I didn’t care for CenturyLink (CTL-$28) in 1988, when $3,000 would have bought 100 shares that paid a niggardly $12 dividend. A 100-share purchase in 1988 has segued into 928 shares today, worth $27,800 — an impressive 8.75 percent compounded annual return, not including dividends. Meanwhile, today’s $2.16-per-share dividend, totaling $1,963, is 163 times more than that $12 dividend.

And I didn’t like CTL when it traded at $20 in late 2008 or when it traded at $47 two years later. And today, at $28, with a 7.4 percent yield and lower revenues and earnings projected for 2016, I still don’t like CTL, which has 556 million shares outstanding. And apparently, neither does T. Rowe Price Equity Income Fund, which, between September 2015 and June 2016, unloaded 16 million shares of its 20 million-share position. In fact, it seems that many of CenturyLink’s officers and directors don’t like the company, either. Since September 2010, officers and directors, during 144 insider transactions, have sold over 3 million shares. And during that six-year time frame, there have been five insider purchases of CTL by directors, totaling 25,000 shares.

CenturyLink, founded in 1968, has 47,000 employees, had $17.9 billion in 2015 revenues and is the third-largest telecommunications company in the U.S. It provides internet, broadband, voice and wireless services to consumers and businesses, as well as entertainment services under the CenturyLink Prism TV and DirecTV brands.

Revenues in 2012 were a record $18.4 billion, but each year since, they’ve inched lower, to an expected $17.7 billion this year. And record 2012 earnings of $1.48 billion are expected to be lower this year, at $1.4 billion. In 2017, revenues are expected to come in a little lower again, at $17.6 billion, and earnings may also continue to inch lower next year. Wall Street is looking at $1.3 billion, certainly enough to cover the $2.16 dividend. But the lack of revenue and earnings progress is concerning to numerous investors — including T. Rowe Price, which may unload its last 3.8 million shares.

On the other hand, analysts at Merrill Lynch, Morningstar, Market Edge, S&P Capital IQ, J.P. Morgan, Raymond James, Wells Fargo, Goldman Sachs, Oppenheimer, Barclays, Citigroup and others have positive reports on CenturyLink. It might be foolish of me to pan CTL when a dozen of the Street’s best seem to adore it.

Net profit margins, which crashed from 15 percent in 2010 to 4 percent several years ago, are improving. In the coming few years, those margins could come in at 10 percent. And it seems CTL’s revenues will enjoy organic growth as gains in demand for Ethernet-, MPLS- and facilities-based video services have been brisk. Meanwhile, management’s international expansion of its CenturyLink Cloud is moving ahead, and CTL is positioning itself as a global leader in cloud infrastructure, IT solutions and content-driven services. CTL’s cloud is currently operational in the U.S. plus several European nations and will be introduced shortly in the Asia-Pacific region. Meanwhile, with acquisitions, CTL has been bolstering its security services business. A recent deal with WISeKey, an analytical firm, will provide enhanced cybersecurity services for the providers. And as management builds a better company, investors, receiving a 7.4 percent dividend, won’t mind waiting a few years for their capital gains. The $2.16 dividend is well-covered and makes waiting easier. Still, I don’t care for CTL.

Malcolm Berko addresses questions about stocks. Reach him at P.O. Box 8303, Largo, FL 33775 or mjberko@yahoo.com.

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