Two Dividend Stocks to Own in 2010

Third-quarter net income surged 231% to $281 million as revenue soared 188% to $1.9 billion. CenturyTel, based in Monroe, La., completed its acquisition of Embarq, a local exchange carrier, in July. The all-stock merger was dilutive to common shareholders, but strengthened CenturyTel's geographic reach and margins. In the latest quarter, its operating margin widened from 28% to 30%, beating integrated-telecommunications peers AT&T(T) and Verizon(VZ).

CenturyTel doesn't offer the same margin of safety as Kimberly-Clark. The stock's 7.7% dividend yield is higher than that of benchmark averages as well as Verizon and AT&T. However, CenturyTel's 96% payout ratio indicates that a few off-quarters could cause a distribution cut. If the economy keeps improving, the company will, at least, come close to analysts' 2010 consensus earnings target. If CenturyTel is able to match expectations, its dividend not only will be safe, but also has room to grow.

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Still, there are risks. CenturyTel is suffering from rapid line losses, which is being compensated for by growth in high-speed Internet and television. The company's return on equity tagged 4% in the third quarter, trailing the telecommunications industry average, but beating the S&P 500. Return on assets was equally unimpressive at 2%. The Embarq acquisition is expected to produce significant cost savings.

CenturyTel trades at 13 times trailing earnings and 10 times projected earnings, significantly less than comparably sized peers. Its 1.1 book value multiple represents a 90% discount to the telecom-industry's average, a 49% discount to Verizon and a 31% discount to AT&T. CenturyTel is more expensive than its average peer on the basis of sales and cash flow per share. Over the past five years, the stock has returned 5% annually, on average, outperforming the S&P 500.

-- Reported by Jake Lynch in Boston.

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