Though the market is currently in turmoil, the stock of global telecom CenturyLink (NYSE:LUMN) has been in the doldrums for a while. After its 2017 merger with Level 3 Communications, CenturyLink has run into trouble with declining revenue and a falling stock price, missing out on the rally of 2019.
On the other hand, management has done a good job of realizing operating synergies and keeping free cash flow constant. CenturyLink's dividend cut in early 2019 also caused the stock to decline initially, but the extra cash allowed CenturyLink to pay down debt in 2019 while also investing in new growth drivers, such as high-speed connectivity and edge computing.
With a current dividend yield over 8.3%, and one that's well covered three times over by free cash flow, is now the time for investors to look at this bargain-priced stock?
The market has not been kind to value stocks in the past decade, instead bidding up high-revenue-growth stocks over the last 11 years since the financial crisis. CenturyLink is definitely a value stock, in that it has a cheap valuation and high dividend yield. However, recent revenue declines have been concerns for investors. Last year, revenue declined another 4.4%, leading many to extrapolate that out into the future.
The following chart shows a revenue surge in late 2017, but that was due to the Level 3 merger:
The reasons behind CenturyLink's revenue decline has been the continued declines in landline phones, as well as older copper-based connectivity solutions.
How management is tackling challenges head-on
Fortunately, CenturyLink also has one of the world's best fiber-optic networks, the technology that offers lightning-fast, low-latency connections that will increasingly be in demand. That's what management is telling investors to focus on.
CenturyLink is also headed by CEO Jeff Storey, which one activist investor once called the "Tom Brady" of the telecom industry. His plan is currently in motion, consisting of the following:
- Huge synergies. Putting CenturyLink and Level 3 together offered both companies huge cost savings. In 2018, the first year after the merger, CenturyLink cut $800 million in costs out of the business. In 2019, management found another $800 million to $1 billion of opportunity, of which it achieved $430 million during 2019. That expanded adjusted EBITDA margins from 38.6% to 40.5%, enabling the company to actually grow adjusted EBITDA slightly in 2019, despite continued revenue declines.
- Reinvestment in the business. Many investors booed 2019's dividend cut, but it may be the key to CenturyLink getting back on the growth path. In 2019, the company grew capital expenditures by over $450 million to $3.6 billion, adding 18,000 additional fiber-fed enterprise buildings to its footprint that now reaches 170,000 fiber buildings. The company is also targeting certain neighborhoods for fiber-to-the-home deployment in its consumer segment. Though CenturyLink continues to shed subscribers in its consumer broadband business, it grew subscribers in areas that offered 100 Mbps and above.
- Debt reduction. Finally, management has also done a great job of paying down the company's huge debt pile, lowering net debt from $37.5 billion at the end of 2017 to $33.4 billion by the end of 2019. Not only that, but management has also been able to refinance existing debt a lower interest rates, thanks to the current low-rate environment and lower risk. By lowering debt and refinancing, management expects to lower interest expense by $200 million in the upcoming year, a figure that would be $350 million lower than 2018.
But do these factors make it a buy?
You don't get a yield over 8% on any stock unless you're willing to take on some risk. That's most certainly the case with CenturyLink, which faces some real headwinds that are pressuring its top line. However, underneath that, there are parts of CenturyLink that are growing. Adjusted for currency, CenturyLink grew its important enterprise and international segments sequentially in the second half of 2019 versus the first half.
On the conference call with analysts, Storey said: "[I]t is a growing pie in some parts and a shrinking pie in other parts. And sometimes, we get so focused on the shrinking pie, we're not paying attention to the growing pie, and that's what I think we also do differently."
Whether or not CenturyLink is a buy for you depends on your appetite for risk as well as your faith in management, because it will take excellent execution for CenturyLink to make it to revenue growth again. However, with a yield that large and a forward price-to-earnings ratio of just 8 times 2020 earnings, CenturyLink remains a value stock with huge upside.