CenturyLink's (LUMN -5.15%) fourth-quarter earnings came with mixed reviews for investors. The fiber-optic company met earnings while beating Wall Street expectations in revenue. This news sent the stock falling in after-hours trading.
The financial condition of CenturyLink rightly causes some concerns. The debt burden remains heavy, and the company suffered for years as customers turned away from fiber-based communications. However, it has returned to profit growth as the industry repurposes the company's fiber network. This new niche could make CenturyLink stock a potentially lucrative investment.
Lower profit and revenue
CenturyLink earned a non-GAAP (adjusted) profit of $0.33 per share in the fourth quarter. That amounts to a drop of 10.8% from the same quarter last year, when the company reported a profit of $0.37 per share. Revenue of $5.57 billion saw a 3.8% decline from the fourth quarter 2018 number of $5.78 billion. Still, that reduced number came in $20 million ahead of consensus estimates.
At first glance, CenturyLink looks like a tech stock to avoid. The company owns a 250,000-mile U.S. fiber network and a 300,000-mile international transport network. However, a wave of cord-cutting led customers to drop CenturyLink services in droves. Moreover, the rise of 5G has changed fiber needs, meaning homes and businesses no longer need fiber running to their premises. Moving into cloud, security, and managed services failed to stem the declines.
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The stock peaked in 2007 at just under $50 per share. While it had regained most of its financial crisis decline by 2011, it has steadily fallen since that time.
CenturyLink can thrive in a 5G world
Despite this massive, long-term decline, it could see an upswing as analysts forecast an increase in profits. Why? Put simply, instead of destroying CenturyLink, 5G may have saved the company.
Here's how.
As it so happens, 5G networks remain heavily dependent on fiber. From an infrastructure perspective, the biggest difference between the previous 4G LTE standard and the current 5G is the number of cells needed. Instead of one cell every few miles, 5G requires numerous small cells located close to one another.
As a result, carriers have exponentially more cells, and they all need to connect to their networks. To do this, carriers such as AT&T (T 1.88%), T-Mobile (TMUS 0.57%), and Verizon (VZ -0.53%) will need CenturyLink's fiber. Hence, instead of fiber becoming obsolete, it may become more important than ever to the telecom industry.
The company can meet debt obligations
Moreover, this Monroe, Louisiana-based fiber company has evolved into a $15 billion company that has now amassed long-term debts of about $32 billion. While down from the peak of approximately $37 billion following the takeover of Level 3 in November 2017, it still places a significant burden on the balance sheet.
Admittedly, much of the debt came from the buyout of Level 3 Communications, which set CenturyLink back $34 billion, including debt costs. Such a debt amounted to an all-in bet on fiber and left the company with insufficient capital to become a wireless 5G player.
Still, despite this challenge, CenturyLink brings in enough money to service the debt and pay its dividend. The company spent $484 million in interest payments in the most recent quarter. Also, the company continues to chip away at the debt. In the last quarter, it reduced long-term debt by $987 million and paid $271 million in dividends.
CenturyLink's generous dividend
This comes after a long-term reduction in the stock price led to the company's board slashing the dividend. The annual payout, which had long stood at $2.16 per share, fell to $1.00 per share. Nonetheless, the lower payout still leaves the dividend yield at more than 7%.
Due to a $6.5 billion impairment charge on goodwill in the first quarter of 2019, CenturyLink's dividend for the year exceeded profits. However, the company easily covered this dividend obligation in the other three quarters of 2019.
Also, despite these costs, it reported free cash flow of nearly $1 billion during the quarter. So, while the debt remains a danger, the company has managed its expenses. Hence, those attracted to this dividend yield can feel comfortable that the company can maintain this payout.
With the telecom world focused on 5G, a fiber company such as CenturyLink may not attract intense investor interest. Yes, profit growth stagnated, and the debt burden left from the Level 3 acquisition will probably remain a concern for years to come. However, with an improving balance sheet, an attractive dividend, and an opportunity to indirectly benefit from 5G, investors CenturyLink stock may benefit over the long haul.
