Stock price when the opinion was issued
A company in transition. It went from being very focused and very established in land lines, and is slowly trying to change into more towers and global networks. There is probably another year of this transition. You buy this because of the dividend yield of 7.5%. There is not a ton of volatility because they have had a pretty consistent execution plan, where the landline is decreasing and the mobile is increasing. Don’t expect the price to appreciate, just be happy with the dividend.
This and Level 3 Communications (LVLT-N) made a huge strategic acquisition several weeks ago. Both companies were regional wire line telecom providers, trying to convert into Cloud hosting businesses. They realized that if they didn’t come together, they were going to die a slow death separately, so merged to form a bigger unit. One thing CenturyLink is obtaining in the Level 3 transaction is $10 billion in net operating losses. That means CenturyLink is going to have a very, very low tax bill for a long time. Because they are going to be saving money on taxes, they are going to use that to sustain the dividend. Don’t expect any dividend growth, although you are getting a big yield.
He likes the dividend on this. It is merging with Level 3 Communications (LVLT-N). The combined entity is going to have a tremendous amount of free cash flow. Level 3 has billions of dollars of net operating losses, so are not going to pay taxes for a very long time, which is going to really support the dividend for a long time. Until the deal closes, the fundamentals of the business they are in is deteriorating. This is selling off in unison with others that are under siege in the telecom industry. What they need is for the deal to close and for management to show investors what that combined entity and what the cash flow is going to be once they are together. He would suggest owners stay patient. Dividend yield of 11.5% will be sustainable under the new entity.
In the telecom space the biggest risk is in interest rates. It is conceivable that we see inflation getting closer to 3%, so rate increases are likely. No matter the fundamentals, this sector will be hit. There could be bounce up on this stock, but there is a lot of risk.