CenturyLink Inc.

CenturyLink Inc. (CTL - Analyst Report) shares have gained nearly 34.73% since August 2011, thanks in large part to the gradual recovery of the U.S. economy and the acquisitions of Embarq, Qwest and Savvis . Moreover, this wireline service provider currently enjoys an exceptional dividend yield of 7.3%.

Shares received a further boost after the company reported strong first quarter 2012 earnings results, which included a 15.3% positive earnings surprise and a solid guidance. Earnings estimates have been moving higher since then, helping it achieve a Zacks #2 Rank (Buy) stock.

A Healthy First Quarter

On May 9, CenturyLink reported first quarter 2012 adjusted net earnings per share of 68 cents, well above the Zacks Consensus Estimate of 59 cents but below last year’s 78 cents. The decline was mainly due to an after-tax charge of $43 million related to severance costs associated with expense reduction initiatives.

Total revenue of $4.61 billion was in line with the Zacks Consensus Estimate and improved an enormous 171.8% year over year.

Financial Guidance Shoots Up

For 2012, management raised its operating cash flow estimate to $7.45 - $7.65 billion from $7.4 -$7.6 billion. The forecast for adjusted earnings per share was increased to between $2.35 and $2.55 from $2.25 to $2.45. However, the projections for operating revenue ($18.2 -$18.4 billion), free cash flow ($3.2- $3.4 billion) and capital expenditures ($2.6 -$2.8 billion) remained unchanged.

Earnings Estimate Revision Growing

Estimates for CenturyLink have been rising significantly over the last 60 days. The Zacks Consensus Estimate for 2012 moved up 3.33% to $2.48, indicating year-over-year growth of 12.14%.

Exceptional Dividend Yield

CenturyLink has a current dividend yield of 7.3%, which is above its 5-year average dividend of 6.5%. In contrast, the average dividend yield of the industry is 4.5%. The dividend rate has increased by 63% annually over the last 5 years, resulting in a payout ratio of a whopping 333.0%.

Valuation Looks Compelling

Valuation of CenturyLink looks reasonable. The current forward P/E of 16.02x implies an attractive discount of 24.2% from the peer group average of 19.89x. However, with respect to the Price/Sales, the stock is currently trading at 1.35x, a 17.4% premium to the peer group average of 1.15x. The stock looks attractive given a trailing 12-month ROE of 6.4%, which is 68.42% above the peer group average of 3.8%.

Strong Chart

The stock has been consistently trading above its 200 and 50-days moving averages since January 2012. Average volume also remains good at 5,049K. The widening gap between the stock price line and that of 50 and 200-days moving averages show the growing momentum of CenturyLink.

CenturyLink completed the full integration of Embarq (acquired in July 2009) in the fourth quarter of 2011, achieving annual cost synergies of approximately $375 million. Qwest was acquired in April 2011 and CenturyLink management is hopeful that full integration will provide annual cost synergy of around $650 million. Savvis was acquired in July 2011 and helped CenturyLink to diversify into the cloud computing business, which is growing by leaps and bounds. Savvis will more than offset the decline of legacy voice and access revenues.

Three major acquisitions, a fabulous dividend yield and a strong balance sheet make CenturyLink a solid pick for growth & income investor.

Headquartered in Monroe, Louisiana, CenturyLink Inc. was founded in 1968 and is currently the third largest wireline service provider in the U.S. The company provides local and long-distance, network access, private line, public access, broadband, data, managed hosting, colocation, wireless, and video services to individual consumers and business enterprises.

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