Some investors are focused on total returns from their investments, which means that they don’t have to put much weight on dividend yields. For those that live off their dividend income, higher-yielding stocks are very appealing. We believe that it thus makes sense to look at the highest-yielding stocks of major indices to see whether quality income stocks could be on sale at the moment.

Right now CenturyLink is one of the 10 highest-yielding dividend stocks in the S&P 500 index, and we believe that it could be an attractive investment right here.

Company Overview

CenturyLink is a telecommunications company that offers services such as VPN data networks, Ethernet services, broadband, etc. to residential customers, wholesale customers, and governmental customers. CenturyLink was founded roughly 50 years ago and is headquartered in Monroe, Louisiana. The company is valued at $13.2 billion right now.

Recent Results And Growth Outlook

CenturyLink’s most recent earnings results were announced on May 9. During the first quarter of 2019, CenturyLink generated revenues of $5.65 billion, which was 5% less than the revenues that the company has generated during the previous year’s first quarter. This revenue decline did not come unexpectedly, though, and was the result of asset sales and discontinuations of some business lines. CenturyLink’s management decided to stop unprofitable operations, which has resulted in a small revenue decline that was visible during recent quarters.

This has not hurt CenturyLink’s profits, though, as CenturyLink was able to increase its margins, partially due to the positive impact that the discontinuations of non-profitable businesses had on CenturyLink’s finances. Adjusted EBITDA totaled $2.26 billion during the first quarter, and CenturyLink generated earnings-per-share of $0.34 during Q1.

Going forward, CenturyLink will most likely not generate strong growth rates, as the company does not operate in a high-growth industry. Some earnings growth over the coming years is not unlikely, though. Further margin increases could provide some operating earnings growth, and CenturyLink’s plans to deleverage its balance sheet will result in lower interest expenses, which should positively impact its net profits as well. The rising importance of 5G technology could provide some growth tailwinds on top of that. We believe that a long-term earnings-per-share growth rate of 5% annually could be achievable for CenturyLink.

Dividend Yield And Sustainability

Investors will most likely not favor CenturyLink for its okay growth rate, but rather for its high dividend yield. CenturyLink has cut its dividend in the not so distant past, but the company’s shares nevertheless offer a very high dividend yield of 8.3% right here.

The quarterly payout of $0.25 is covered by earnings-per-share, with a dividend payout ratio of 74% during the most recent quarter. More importantly, CenturyLink’s dividend payments are easily covered by its free cash flows. During the most recent quarterly earnings announcement, management stated that CenturyLink was on track to generate free cash flows of $3.3 billion during 2019.

Total dividend payments will come in at $1.1 billion during the current year, which means that dividends are covered by a factor of 3, which is why we believe that CenturyLink’s dividend is safe for the foreseeable future. The company plans to reduce its leverage meaningfully over the coming years, but this will be possible with dividends staying at the current level, thus deleveraging plans are not a problem for CenturyLink’s dividend safety.

Investor Takeaway

CenturyLink (CTL) is not a high-growth company, but it should generate at least some growth going forward, with interest expense savings due to CenturyLink’s deleveraging efforts being a key factor. CenturyLink is primarily attractive for its very high dividend yield, though, as the company offers a yield of 8.3% to income investors, which is more than 4 times the broad market’s dividend yield.

We believe that CenturyLink’s dividend is not at risk, which makes the company attractive as an income investment. When we also factor in that CenturyLink trades at a quite cheap valuation of ~4 times this year’s expected free cash flow, and ~10 times this year’s expected net profits, it looks like it could be a good time to enter or expand a position in CenturyLink around current prices.