A new age of internet connectivity and communication is upon us, and CenturyLink (LUMN 1.14%) could find itself on the outs. Mobile network operators like Verizon (VZ 0.01%) are rolling out super-fast 5G connectivity technology, which could put them in direct competition with legacy internet service providers (ISPs) like CenturyLink, not to mention further accelerate declining phone line and cable TV business.
CenturyLink may be in the woods at the moment, but not all is lost. The company has extensive fiber-optic assets across the country, and recent changes to its dividend payout gives it ample cash to update older parts of its operations. While no one can know for sure where the company will sit in five years, I think CenturyLink will still be a relevant part of the internet infrastructure in the U.S. -- if not alone, then maybe as an acquisition target of a larger rival.
Finalizing an acquisition of its own
CenturyLink purchased former ISP rival Level 3 Communications back in 2017 to expand its network of high-speed-internet fiber and to create a more efficient telecommunications business. The first year as a combined entity was a mixed bag of results.
Revenue fell 3% in 2018, driven primarily by losses in phone and cable. Business services and high-speed internet connections were a bright spot, but those only partially made up for lost ground. As a result, CenturyLink's stock has fallen 29% in the last 12-month stretch. Of course, some of that is due to the company's recent halving of the dividend, reducing it to $1 a share (still good for an 8.4% annual yield as of this writing) from $2.16 a share before. Investors are usually unkind to a pay cut.
There were some good things that happened, though. Savings from synergies between the two businesses and other cost-cutting post-Level 3 buyout reached $850 million -- two years ahead of schedule -- with another $800 million to $1 billion expected over the next three years. Free cash flow (money left over after basic operations and capital expenditures) increased to $3.86 billion from $1.57 billion in 2017. Paired with the dividend cut, CenturyLink now has plenty of cash coming in to keep it afloat for years.
Image source: Getty Images.
Too much indebtedness and too far behind?
Nevertheless, the telecom is still stuck in a slow downward slide and has lots of debt on the books -- to the tune of $36.1 billion at the end of the year. With a current enterprise value of $48.6 billion, that means most of CenturyLink's current valuation is made up of its debt load.
Though CenturyLink's ISP assets -- especially the fiber-optic lines, which are also a key component of a 5G mobile network -- would be a valuable addition to a competitor's network infrastructure, the high price tag due to all that debt may keep that from happening for now. However, over the next few years, the company plans to accelerate its debt payoff with some of its newfound cash flow. That could make it a more attractive target, not to mention reduce the $2.18 billion in interest expense paid in 2018.
Check out the latest earnings call transcript for CenturyLink.
Thus, it's more likely that CenturyLink is still a going concern by itself in five years time. Besides paying off debt, management plans to begin upping its reinvestment back into the business to try to rekindle growth. Areas of emphasis are mostly around business and enterprise services like cloud computing, security, and edge computing -- bringing memory and computing power closer to home. Consumers will also be happy to hear that improving the customer experience is also on the to-do list.
Of course, in five years, CenturyLink will likely be contending with the full-blown migration over to mobile 5G, so it remains to be seen how the company will counter. Between now and then, however, this old telecom has another shot at redemption.
