CenturyLink, Inc. (CTL), Verizon Communications Inc. (VZ): I Wish This Was Simple

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Sometimes it’s hard to know whether to hold a stock, buy more, or sell it. You have to look at the company’s performance, remind yourself of why you bought the stock in the first place, and then see if anything has materially changed. This is sort of where I am with CenturyLink, Inc. (NYSE:CTL). On the one hand, the company had to cut its dividend, but they also instituted a significant share repurchase at the same time. However, looking at their recent earnings makes me wonder if a better option is presenting itself.

The search for something better
I believe that periodically re-evaluating your positions is key to staying ahead of the game. Even great companies can decline, and sometimes companies that are down in the dumps can rebound.

One of the reasons I bought CenturyLink, Inc. (NYSE:CTL) originally was the company’s yield was north of 7%. However, when they cut the dividend, this drove my effective yield down to about 5.8%. That being said, their share repurchase plan seemed a reasonable substitution, and I held on. The good news is now their core free cash flow (net income + depreciation – capital expenditures) payout is just 45.43%, and their balance sheet is stronger than most of their peers with a debt-to-equity ratio of 1.04.

Looking at their peers, investors looking for yield might gravitate toward Windstream Corporation (NASDAQ:WIN) and their 11.4% yield. However, the company’s core free cash flow suggests a payout ratio of 107%, which I’m not comfortable with. In addition, Windstream’s balance sheet is downright scary with a debt-to-equity ratio of nearly 8.

Verizon Communications Inc. (NYSE:VZ) is the poster child for stability in the sector, but the company’s yield of 3.9% doesn’t exactly scream opportunity. However, the company’s core free cash flow payout is just 27.41%, and their debt-to-equity is far lower than their peers at just 0.48.

The company that has caught my attention is Frontier Communications Corp (NASDAQ:FTR). While it’s true that Frontier had to cut their dividend last year, the stock currently yields more than 9%. Normally a 9% yield would make me nervous. However, the company’s core free cash flow payout is a reasonable 60.33%. While Frontier’s debt-to-equity ratio is higher than either Verizon Communications Inc. (NYSE:VZ) or CenturyLink at 2.06, the company’s balance sheet is much stronger than Windstream Corporation (NASDAQ:WIN).

Is CenturyLink losing ground?
Whether you believe CenturyLink, Inc. (NYSE:CTL) is losing depends on what you look at. If you are looking for yield and growth, than Frontier Communications Corp (NASDAQ:FTR) has everyone beat. Analysts are calling for over 20% EPS growth in the next few years. Compared to Verizon Communications Inc. (NYSE:VZ)’s expected growth of about 9%, CenturyLink at 1%, and negative growth of more than 11% at Windstream, Frontier seems to be the clear leader.

Another area where CenturyLink, Inc. (NYSE:CTL) and Frontier have switched places is in operating margin. At the beginning of last year, Frontier’s operating margin was under 15%. Today, the company reports a margin of 20.81%. This huge increase is good enough for second behind only Verizon Communications Inc. (NYSE:VZ) with a 21% margin. By comparison, CenturyLink, Inc. (NYSE:CTL)’s operating margin now stands at 17.33%, which is only ahead of Windstream at 15.76%.

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