Centurylink Inc (CTL): Safe Dividend Income Or A High-Yield Telecom Trap?

Management, led by CEO Glen Post, whose has been with the company since 1976, has attempted to overcome this secular decline by large scale acquisitions, such as the 2008 $11.6 billion acquisition of rural telco Embarq, and 2011’s $12.2 billion purchase of Qwest Communications.

The idea was that consolidating rural telecom companies would give CenturyLink sufficient cash flow from internet and small business customers to allow continued top line sales, achieve economies of scale that boosted margins, and thus lead to a secure and growing dividend.

Similarly, the Savvis acquisition would provide global diversification in data centers and give CenturyLink a foot in the door of the fast-growing cloud computing sector.

However, in reality, management has struggled to execute on its vision. For example, the data center business has found itself unable to compete with larger, better capitalized rivals such as Amazon.com, Inc. (NASDAQ:AMZN), Microsoft Corporation (NASDAQ:MSFT), International Business Machines Corp. (NYSE:IBM), Alphabet Inc (NASDAQ:GOOG) or Cisco Systems, Inc. (NASDAQ:CSCO). The company’s two top cloud executives left the company last year as well.

Meanwhile, stronger competitors in internet such as AT&T, Verizon, and Comcast have steadily encroached on the company’s strongest urban internet markets, especially Minneapolis, Las Vegas, and Phoenix.

The trouble for CenturyLink is that the telecom industry is brutally capital intensive, especially in broadband service, where consumers are constantly demanding faster and more reliable service.

Source: CenturyLink Investor Presentation

For example, the company expects that by 2019 11 million customers in its service areas will be able to purchase 100 Mbps internet access, while another 3 million will be eligible for 1 Gbps speeds.

In other words, thanks to rising competition from cable and wireless giants, CenturyLink has had to really step up its capital spending in order to be able to compete with similar speed internet access. All while legacy customers cut their phone cords, starving it of the cash flow it needs to fund its expensive broadband upgrades.

And as you can see, fierce competition, flat sales growth, and poor capital allocation decisions have hurt margins over the last five years.

Source: Simply Safe Dividends