Following years of decline, investors in CenturyLink (NYSE:CTL) have seen some signs of hope. After reporting a mixed quarter in early May, CenturyLink stock has begun to rebound after briefly dipping into the single-digits.
Many have responded well to the lower but generous dividend and management’s plan to turn the company around. The business still faces high debt levels and declining revenues. However, the advent of 5G could bring a demand for fiber infrastructure that could bring about a recovery in CTL stock.
The Long, Slow Decline of CenturyLink Stock
It goes without saying that bulls in CTL stock have deeply suffered in the 2010s. CenturyLink peaked at just under $47 per share in late 2010. Declines came slowly at first, and CenturyLink stock traded at just above $40 per share as late as 2014. However, the drop accelerated, falling briefly below the $10 per share level in May.
Put simply, the stock has suffered from cord cutting. In an increasingly wireless world, the wireline and fiber offerings of the Monroe, Louisiana-based technology company have seen less demand.
The company diversified into connectivity, cloud, security, and managed services. However, that did not immediately stem declines in the customer base or the stock price. As a result, the previous $2.16 per share annual dividend became unsustainable. Cutting the dividend to $1 in February may have increased cash flow, but it also steepened the selloff of CenturyLink stock.
Sentiment Is Improving
Still, this leaves the dividend yield at a generous 9.4%. Management has also shifted priorities to turn the company around. Moreover, they initiated plans to cut debt and increase free cash flow. This should strengthen the balance sheet that leaves the company in a better position to acquire more valuable assets.
Much of that debt reduction could come from asset sales. As our own Will Ashworth reported, the company has explored strategic alternatives for its consumer unit. That could mean selling the unit that generates about 25% of company revenues. However, that would also make a meaningful dent in its crushing $36 billion debt load.
With the lower stock price, investors have again begun to take an interest in CTL. Guggenheim upgraded the stock to neutral when it fell below $10 per share, saying it had reached fair value.
CenturyLink and the Rise of 5G
However, investors might have a much better reason to take an interest in CenturyLink. A recovery in the stock may come about from an unexpected source—5G wireless. Given the expected reach of 5G, one might think that reduces the demand for CenturyLink’s fiber infrastructure. With a wireless signal reaching phones, tablets, laptops, and Internet of Things (IoT) devices, the average consumer will probably not want CenturyLink’s fiber-based offerings.
Still, businesses and wireless providers may see the situation differently. 5G brings real-time data, lower latency, and higher bandwidth capacity. However, that requires as many as 600 cells to cover the square mileage covered by just one site in the 4G world.
Fortunately, optical fiber has become the preferred medium for this purpose. Hence, a technology that some regard as the past could bring a needed component to connect the future.
Final thoughts on CenturyLink stock
Amid a falling revenue base in a falling business, CenturyLink may have positioned itself to connect the future with the rise of 5G. CTL stock has suffered for most of the decade as residential customers have abandoned landline phones and pay-TV plans. These consumer trends have reduced revenues and made many investors question the company’s long-term viability. CTL responded by reducing the dividend and exploring options to reduce its debt.
However, its saving grace could come in the form of 5G wireless. Rather than making fiber obsolete for customers, it may bolster the connectivity that makes 5G possible.
The high dividend yield and the elevated debt levels make CenturyLink high risk. I agree with Ashworth that such an equity does not belong in a retirement account. However, for those wanting a low-cost play in 5G with a generous payout, CTL may provide a lucrative solution for risk-tolerant investors.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.
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