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  1. Home
  2. / Investing
  3. / Telecom Services

Don't Hang Up on CenturyLink

The third-largest U.S. telecom has a lot on the line for investors.
By CHRIS LAUDANI Oct 04, 2016 | 12:00 PM EDT
Stocks quotes in this article: CTL, VZ, T

Shares of CenturyLink (CTL) are up 15% so far in 2016. With a nearly 8% yield, you'd think more people would be talking about this stock.

Believe it or not, CenturyLink is the third-largest telecom communications provider in the U.S. It was cobbled together by through non-stop mergers with the remains of GTE, Qwest Communications and Embarq (a former Sprint unit). CenturyLink is the largest rural exchange providing residential, business and wholesale customers in 37 states. It has 14 million access lines and 5.9 million high-speed internet connections. It operates a well-regarded 250,000 route-mile fiber network in the U.S. and a 300,000-route mile international transport network.

The company is rolling out a "gigabit-capable" fiber service. The service will pass 1.5 million households by year's end. Only 16% of the passed households have signed up for the service. Management believes it can surpass 4 million homes by the end of 2017 with at least 100 Mbps service and has a plan to surpass 14 million homes longer term.

CenturyLink is in the midst of selling its data-center business. It operates 55 data centers in North America, Europe and Asia. The business generates more than $600 million a year in revenue and a sale could bring in more than $2.5 billion. Currently there are four private equity firms bidding for all its data center assets. Management believes a deal could be struck in the third or fourth quarter of 2016.

Wall Street believes the proceeds will go to pay down debt and buy back shares. The company has a substantial debt load; long-term debt is $18 billion, which dwarfs $13 billion in shareholder equity.

The company guided down the first quarter of the year because it was not able to get the $40 million in price hikes it tried to push through in a handful of states. In addition to pushback from regulators, sales were hurt by a sales-force reorganization.

The second quarter was not much better. The company reported total revenue of $4.4 billion, in line with analyst estimates. Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) of $1.65 billion were slightly ahead of estimates.

There has been some confusion over a proposed Federal Communications Commission rule change that would cut the amount of money CenturyLink and other rural carriers receive in order to provide broadband service. The FCC mandated payments to local telecom firms that provide rural homes and businesses with broadband access, because, frankly, no one wanted to pay to run fiber lines to rural customers.

Now the FCC is proposing to cut those payments to the carriers. The cut could amount to as much as $1.4 billion. There is no timeline for cuts and this issue will undoubtedly end up in court. So, at this time, it's unclear how this would affect CenturyLink, but it's an issue that could pressure the stock.

In terms of revenue and earnings, CenturyLink is boring. Fiscal 2016 revenue is expected to decline 1.8% and decline 0.7% next year. Analysts see earnings of $2.54 in 2016 and $2.41 in 2017. The company has been pressured by the decline in legacy wireline revenue as customers ditch their landlines and go mobile.

With its 7.8% dividend (which is considerably more than the 4.4% dividend from Verizon (VZ) or the 4.7% of AT&T (T) ), you can sit on the stock and wait for the company to reach a deal to dump its data centers. Any deal, especially if it's above $2.5 billion, could be the catalyst to get this stock communicating with investors.

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At the time of publication, Laudani had no positions in the stocks mentioned.

TAGS: Investing | U.S. Equity | Telecom Services

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