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Though both companies work in the telecommunications sector, T-Mobile US (NASDAQ: TMUS) and CenturyLink (NYSE: CTL) could hardly be more different. It should be hard to find an investor that sees value in both of these stocks today. So which one should you own?
Let's talk about that.
"Go easy on 'em, Pete." Image source: Getty Images.
By the numbers
| Metric | CenturyLink | T-Mobile US |
|---|---|---|
| Market cap | $23.5 billion | $55.8 billion |
| Revenues (TTM) | $21.2 billion | $41.8 billion |
| Adjusted net income (TTM) | $1.6 billion | $4.6 billion |
| Free cash flows (TTM) | $2.3 billion | $2.8 billion |
| EBITDA profits (TTM) | $7.3 billion | $11.3 billion |
| Forward P/E ratio | 17.5 | 16.7 |
Data taken from YCharts and FinViz. TTM = trailing 12 months.
This snapshot depicts T-Mobile as the far larger business, sporting nearly twice CenturyLink's market cap and annual sales. But a still-frame doesn't quite do justice to the differences between them. You see, CenturyLink's cable-based business has stagnated, while T-Mobile's wireless operations gained traction:
TMUS Revenue (TTM) data by YCharts.
What's wrong with CenturyLink?
Therein lies the rub. CenturyLink is running an increasingly outdated business, slowly losing subscribers over time. The consumer segment's subscriber counts fell 6% lower over the last year, matched by 7% lower revenues in the same division. Business services aren't doing much better
To be fair, this problem is not CenturyLink's alone -- the company is simply stuck in an aging sector. Cable companies, in general, aren't doing great these days, as their landline cable TV and voice services are losing their appeal. Management is obviously aware of this unstoppable trend, which is why CenturyLink merged with data services specialist Level 3 Communications last year in a $24 billion blockbuster deal. The way forward is more about providing broadband networking services to business customers, but that's also a brutally competitive sector with several large and well-heeled rivals.
And the Level 3 deal is no silver bullet. Among the best reasons for CenturyLink to pull the trigger on that deal was Level 3's $10 billion reserves of aggregated operating losses, which will be used for tax credits that should boost cash flows and earnings over the next few years. In other words, some of the bottom-line muscle you see in the table above is built on Level 3's tax credits and won't stick around for the long haul.
For now, CenturyLink is pouring 87% of those artificially inflated cash flows into a generous dividend policy. The company is not in the habit of boosting its quarterly payouts, but it's hard to complain about a 10% dividend yield -- that is, until the tax credits run out and CenturyLink is forced to lower those juicy payouts. This is not a Dividend Aristocrat in the making, folks.