When many people think of CenturyLink (LUMN 1.92%), they think of an old-school regional U.S. telephone company. As landlines and low-bandwidth copper internet are going the way of the dinosaur, these people probably think CenturyLink will follow suit. Certainly, CenturyLink's 15% dividend is telling market participants that there is danger ahead. In addition, CenturyLink recently reported an ugly 7.9% decline in revenue and a 12.5% decline in adjusted EBITDA last quarter, though that was partially (though not completely) affected by the sale of its co-location business earlier this year.
Yet one analyst, Gabelli's Sergey Dluzhevskiy, thinks the company is misunderstood. Thanks to years of investment and the recent acquisition of Level 3 Communications, the company now has an asset that may prove valuable for future 5G LTE networks -- a global fiber-optic footprint.
Why fiber is important
Fiber-optic cable is the main circulatory system for today's fastest communications. As the need for bandwidth continues to explode, more and more fiber will need to be used. This is true not only for today's fixed broadband connections but also for 5G LTE, which should be coming in the next several years.
5G LTE promises exponentially faster mobile speeds, which will enable future applications not possible today. It will most likely use millimeter wavelengths, as these high-frequency bands are the only bands capable of transmitting large amounts of data extremely fast through the air.
But while these wavelengths will enable speed, millimeter-wave bands cannot transmit data over long distances or go through objects. Therefore, a fiber-optic cable will need to be installed closer and closer to customers wishing for 5G speeds. That means mobile carriers will likely have to partner with large fiber networks (like CenturyLink-Level 3) in order to bring 5G to customers.
According to Brian Lavallee of fiber-optic equipment-maker Ciena (CIEN -0.63%):
[I]f these cell sites are to be upgraded to 5G in the coming years, as copper and air-based MBH options simply cannot scale to the immense amount of backhaul traffic that'll be generated by a 5G RAN...The only transport media capable of scaling to these demands is fiber, meaning it'll have to be available everywhere, particularly in the RAN to the hundreds of thousands of small and macro cells deployed worldwide.
Gabelli's Dluzhevskiy thus believes that CenturyLink's 450,000 miles of connected fiber (200k for Level 3, 250k for CenturyLink) will be a huge asset when mobile carriers look to roll out 5G to customers.
Management knows this
The good news for CenturyLink shareholders is that management is keenly aware of this. In fact, despite CentruryLink's declining overall metrics, the company is accelerating capital expenditures this year. By early 2020, the company wants to have over 90% of customers on 40 megabits per second or higher, over 70% on 100 megabits or more, and over 20% passed with a full gigabit of speed.
Said incoming CEO Jeff Storey:
We need to get closer and closer to the customer with fiber. We need to build infrastructure to drive the simplification of the way that the customers interface with us. And the more we do that, the more we focus on driving a differentiated customer experience, the more – over time, that will equate to not only reducing costs and higher profitability and better free cash flow, but, over time, will also translate into better growth.
Can it turn around in time?
As I previously wrote, CenturyLink's dividend is currently covered -- though it's not certain that will last. The company has several declining copper-based businesses it must navigate while it ramps up higher speeds and fiber. Of course, most don't expect 5G to be available broadly until 2020 at least, and the hardware standards for 5G have not even been finalized yet. Therefore, CenturyLink will have to manage through this transition with the hope of making it to 5G before it has to cut its dividend.
Fortunately, the Level 3 acquisition will help in a big way. The combined company's network now connects over 100,000 buildings in over 350 metropolitan areas in 60 countries, with over 450,000 route miles of fiber. That's actually the third-largest fiber network in the U.S., according to Dluzhevskiy. At that scale, CenturyLink will no doubt play at least some role in the future of fixed and mobile networks.
Do you feel lucky?
CenturyLink's management is making all the right moves to reposition itself for a fiber-based world. Shareholders must hope these investments pay off, both in the long-term and at least enough in the short-term-term to preserve the dividend.