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CenturyLink: Free Cash Flow Is King

Jun. 08, 2020 2:26 PM ETLumen Technologies, Inc. (LUMN)T, VZ66 Comments


  • CTL’s primary focus is on driving growth in profitable revenue and free cash flow per share.
  • No revenue growth is expected in 2020.
  • Maintaining or growing FCF is the key factor for success in 2020.
  • Long-term investors have multiple ways to win.

CenturyLink (CTL) is a fiber-based communications service company. It has about 1.1B shares outstanding. At $10.8 per share, its market cap is around $11.9B. CTL has net debt of about $33B as of 1Q2020, resulting in an EV of about $44.9B.

CTL has been making steady progress since former Level 3 managers took over as CEO and CFO in mid-2018. The new management team has been executing a strategy to stabilize and eventually grow revenue. It is executing a well-planned transformation plan, a well-articulated capital allocation plan and a realistic balance sheet de-leveraging plan. Everything is going well until the Covid-19 pandemic, which puts execution of these plans at risk. The share price fell. While share price gain may be muted in the near term, CTL remains an attractive long-term investment given management's focus on growth of profitable revenue and FCF, and its history of good execution. Management's commitment to the dividend also helps to support its shares.

CTL's primary focus is on driving growth in profitable revenue and free cash flow per share

To understand the strategy and to measure the progress of execution, we have to understand management's primary focus. In the 4Q2019CC, management said that "our focus is on driving growth in both profitable revenue and free cash flow per share." Free cash flow "FCF" is the key metric that investors should focus on, as it is the means to accomplish the capital allocation plan shown in Figure 1. Figure 1 shows the plan to reduce the leverage ratio (net debt to adjusted EBITDA) to within the range of 3.25 to 2.75 by the end of 2021, to maintain the annual dividend of $1 per share and to continue to invest capital to drive profitable revenue growth. Growing profitable revenue results in growth of FCF. Growing FCF enables CTL to reduce net debt while maintaining

This article was written by

30+ years of trading part time, managing my own money. Value investor. I focus on the industry, business strategy and management execution, rather than the stock price and market trends. I have a long term (3 to 5 year) investment horizon. My research is done to guide my own investment decisions. I look at many companies, conduct detailed research on a few, and invest in those where my research shows compelling value within my investment horizon. I share my research on SA to gain feedback to sharpen my research and logic, and also to discover potential blind-spots.

Analyst’s Disclosure: I am/we are long CTL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

All investments have many risks and can lose principal in the short and long term. The information provided is for information purposes only and can be wrong. By reading this you agree, understand and accept that you take upon yourself all responsibility for all of your investment decisions and to do your own work and hold the author harmless.

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Comments (66)

Justin Wiedeman profile picture
@Long-Term Business Investor

Just did a piece on regulatory revenue that you might find interesting.

Long-Term Business Investor profile picture
@Justin Wiedeman Very informative. Thanks for sharing and bringing this piece to my attention.
Justin Wiedeman profile picture
On Deck - Consumer Broadband. I think you will be shocked really. Huge transformation at CTL but the sell side analysts just won't do the work - or maybe they don't know how?
@Long-Term Business Investor Thanks for a great article, I agree CTL has been improving on EPS but will take a while to turn around on revenue growth; I truly hope 5G will accelerate but we will have to wait and see. Do you think SpaceX Starlink will eventually become a threat to Fiber, maybe in the next 5-10 years?
Thomas Mills profile picture
I think it will be a threat within 2 years.
How? Too much latency, no enterprise would use starling over fiber.....
"Do you think SpaceX Starlink will eventually become a threat to Fiber, maybe in the next 5-10 years?" - @LTPlayer "I think it will be a threat within 2 years." - @Thomas Mills

Straight from the horse's mouth:

"At the Satellite 2020 conference here on Monday evening, Musk said the global business of providing Internet access to the underserved could be, "as a rough approximation," as high as $30 billion a year. "Starlink is not some huge threat to telcos. I want to be super clear: it is not," Musk told the crowd here.

On the contrary, it could be helpful to telcos by serving populations not well covered by cell towers, copper or fiber, Musk said.

"5G is great for high density situations," Musk said, "but it's actually not great for the countryside, you know, for rural areas. It's not great; you need range. And so in any kind of sparse environment 5G is really not well suited."

"So Starlink will effectively serve the three or four percent hardest to reach customers for telcos, or people who simply have no connectivity right now. Or the connectivity is really bad. So I think it will be actually helpful and take a significant load off the traditional telcos," Musk said.

Musk said Starlink is aiming to provide broadband service with latency "below 20 milliseconds," fast enough for a "fast-response video game at a competitive level."" - www.lightreading.com/...

Brilliant analysis, @Long-Term Business Investor Thank you!

We added more to our position below $10 a share in the last couple of days, since I wrote the below comment; our $CTL cost basis now stands at ~$11.53:

"- We increased our position prior to the ex-Dividend date at prices below $10 a share (average ~$9.50), and finally broke the $12 $CTL cost basis barrier. Currently our $CTL cost basis stands at ~$11.[53].

- $CTL is still the only position in the portfolio and our break-even share price is currently $CTL at ~$8.[78], i.e., our Yield-on-Cost is currently ~11.4% and our FCF-Yield-on-Cost, if we assume a conservative Free Cash Flow (FCF) of about $2.7 per share, is about 30.7% and translates to a Margin of Safety FCF-to-Enterprise-Value(EV)-Yield of ~7% for the portfolio, which we feel is very comfortable in our current low interest rate environment.

- We are still DRIP-ing the position (planning on doing so to at least a share price of $15, possibly even higher), and have more cash sitting on the sidelines if more opportunities to meaningfully lower our $CTL cost basis should present themselves." - seekingalpha.com/...

$CTL 's debt maturities for the next 5 years average roughly $1.6 billion annually with the latest refinancing of $1.2 billion; over the next 4 years the average is even lower at approximately $1.45 billlion annually. See Slide 12 s24.q4cdn.com/... and subtract $840 million from the '22 and $360 million from the '23 maturities.

The Margin of Safety for us common stock shareholders is constantly improving.

Here another good, recent analysis:

Is CenturyLink's 9.9% Dividend Yield Safe?

"Rotten to the core or a diamond in the rough?
For those who are willing to play the turnaround game, CenturyLink offers a compelling narrative. The company's revenue trend has improved over the last few quarters. It has trimmed its interest expense significantly and improved its balance sheet. With guidance of a 30% payout ratio range, investors should be able to sleep relatively soundly knowing that the dividend is unlikely to be cut.

As a bonus, CenturyLink shares are down significantly from their highs of just a few months ago. Investors who are willing to bear some risk in exchange for a significant yield and potential capital gain should have CenturyLink on their buy list." - www.fool.com/...

CenturyLink Copper Retirement Slated in Numerous States

"CenturyLink is asking the Federal Communications Commission (FCC) to approve copper retirement in a number of states.

The retirements are due primarily to growth in the areas. CenturyLink will replace copper loops with fiber loops as customers migrate to higher speed broadband. It provides that broadband over its fiber-to-the-home overlay architecture.

CenturyLink copper retirement will happen in parts of Arizona, Colorado, Minnesota, Nebraska, Oregon, Utah and Washington. The company scheduled the fiber implementations for September." - www.channelpartnersonline.com/...
seems like they should benefit from covid wfh . how about 5g ?
Long-Term Business Investor profile picture
@gutcheck 5G will help their Wholesales segment and it is a longer term prospect. Thanks for reading.
Today presented a good opportunity to add to my holdings. Nothing has changed except the price. The cash flow is still there. the div. is still there. ET is still the best company in the oil patch. What we have today is a lot of fear. Completely unjustified.
@ted lujan from CTL a comm company you jump to an oil co....
Long-Term Business Investor profile picture
@ted lujan You are correct. Greed and fear drive the market in the short term. CTL just refinanced more debt to move out maturity and reduce interest expense. They continue to execute their play book. The market may have more correction to do as the Covid-19 cases are increasing. I will keep my powder dry for now. There may still be better prices ahead, IMHO.
Sorry, you are right. I am involved in buying both ET and CTL. Like them both.
Chancer profile picture
@ Long-Term Business Investor:

Thanks for article. I originally bought small with plans to add. But I cancelled that, even with opportunity to average down, because story LIED about a safe dividend that would not be cut.

I think those who criticize the lack of revenue growth fail to recognize CTL's clearly stated goal to increase profitable business.

I have considered adding several times, but every time I do the math, there are better places to invest my money. Just checked again, and not worth it to me. If I doubled my shares, my dividend yield only increases 1% to 7.61%. There are many stocks that yield more with greater capital gain potential,
He never lied. He said they could fund it and they could. They chose to cut it and better allocate the capital. You don't have to like that decision, but saying he lied is disingenuous.
Long-Term Business Investor profile picture
@Chancer The investment universe is very large and it is always a challenge to choose from all the available candidates to invest. No doubt there are other stocks that will have a better RoR than CTL. Can you share which ones you think have better prospects? I may be interested to follow, if not buy them. Thanks for your comments and thanks for reading. Good luck with your investment.
scramyall profile picture
@Chancer - You can double down/average down and still get a steady yield of 7.61%, a 1% increase...? "ONLY," you say....? I'd grab that deal every day if I could get it !! Please, tell us those other deals you have from multi-billion dollar global technology companies that are better?
Excellent article. Long 300k shares @ $10.50 avg. No intention to sell. Unlike VZ and T, sole focus is on leveraging their world classTier 1 fiber assets. Was surprised to see them handling Zoom's traffic, they will figure out a way to fully monetize their network over the next 2-3 years. Though I love the dividend, I would argue for even more aggressive approach to deleveraging and investment in growth. Maybe cut it to .60c a share and still yield 5% but accelerate growth and clean up the balance sheet faster.
Long-Term Business Investor profile picture
@nfgodley CTL has many shareholder constituents and many of them count on the dividend as income. When CTL reduced its dividend to $1 per year, it hurt that part of their constituents. Management has committed to the current payout amount, and barring any major set back in the economy, I do not see CTL changing the dividend amount. There is something to be argued about investing more capex to goose growth and deleverage faster. I think management is trying to have a more balanced approach. Good luck with your investment and thanks for reading.
I agree it would hurt them with some investors in the short term, but long term a lower payout ratio coupled with more deleveraging and investment in growth areas would increase the value of the company. Most of CTL is held by funds & large institutional investors, not sure they would walk away. In fact a high payout ration, even if supported currently, is a danger sign to many investors.
09 Jun. 2020
@nfgodley , a cut to .60c div would trigger a lot of selling, as a result the supposed-to-be yield 5% might have come back to where it was (10%). Then there will be some similar arguments like yours again "reduce yield to 5% and use that cash to clean up balance sheet...". Good for new investors, not for investors who have been holding it for years.
The new management has a good track record in growig the LTV company.There is no reason why they can not achieve the same thing with CTL. It should be an easier job to achieve.So far they seem to be doing a great job.
Long-Term Business Investor profile picture
@ted lujan Management is doing all the right things. They will need time to show results. There are many moving pieces that cloud the picture a bit, but they are focusing on the right areas and executing well. Thanks for reading.
Good piece - the other thing to pay attention to is the "asset value of the fiber network" and the untapped "data center model" they have a great footprint and anything they add on the data center side will be gravy... Majority of sell side firms had buys on the way down, hopefully they get at least one contrarian upgrade.... I like heads down management - sell side does not.... ahh and on an EV/adj.ebitda - I believe this is the cheapest co. out there... even cheaper then CNSL and there's really no comparison - makes absolutely zero sense especially given activity in the sector - perhaps Frontier Bk scares people but I view the industry as being in consolidation big time and the FTR situation is positive. Take out premiums are higher on the private co.s than the public companies, usually doesn't stay that way for long.
Long-Term Business Investor profile picture
@axeandstone Agreed on all your points. Excellent insights. You are right, investors group CTL with the likes of Frontier. In reality, they have different businesses and different focus. CTL is not a telephone company but a fiber company, but it may take time for investors to turn-around to that fact. Thanks for sharing and thanks for reading.
Jamjack profile picture
Good article. Thanks. Patience is starting to pay off for me!
Long-Term Business Investor profile picture
@Jamjack Good luck with your investment. Thanks for reading.
peace 2 u profile picture
@Long-Term Business Investor

I would submit that the biggest problem that CTL has with investors is the complete misunderstanding of what it as to do to exit from the legacy business. The company's origin is found in the old Ma Bell. That was a utility which was kept alive and prosperous by government regulation and rate setting. Unfortunately, CTL cannot make a unilateral decision to close the legacy business. It is far from as simple as unplugging the cell phone from the wall.
The legacy business brings lot of fiber with it.

All businesses cannot be evaluated on the same metrics. Once an investor can understand the proper metrics for CTL, the investor will be inclined to invest in it.

Just a ought or two.
Long-Term Business Investor profile picture
@peace 2 u Unfortunately you are correct about the legacy business and that is why it has a long declining tail that puts a drag on the growing part of the business. CTL's valuation is low because many investors focus on the revenue decline. Hence, CTL is a show-me stock until management can demonstrate consistent growth. Management is doing the right things and their work will eventually pan out. Meanwhile, we all collect the 9% dividend to wait. Not too bad a deal! Thanks for your comment and thanks for reading.
My two cents are...and you touched on this briefly in you comment but know one really speaks about is the perception of this stock. It's awful....People don't want to own this stock no matter how good it looks on paper. An collecting the div. is only as good as the price of the stock. Dividend value goes down with the rest of the stock price so your losing money twice. Give it a week or two and the shorts will be back on and drive this stock price down to $8-9 as it's a winning strategy.....Perception.
Long-Term Business Investor profile picture
@Fidelity 2019 Most investors want growth. They do not want to invest in a company that is on a secular decline trend. I do not think that this is the case for CTL. It does have portions of its services that are on a secular decline. So CTL has to show that the growth of profitable business mitigates the decline of the legacy services. It will take time. Hence, it is still a show-me stock. Thanks for your comment and thanks for reading.
Between CenturyLink and all Level3 fiber assets these guys have a bunch of fiber everywhere and it is not just concentrated in the United States. If you visit their website they have fiber routes in 175+ countries. My company builds their fiber networks inside their data centers, central offices and hubs and we also work on their fiber assets outside of their buildings. We have worked for Level3 on their network for the last 20 years. I have seen all the advances and we have participated in making some of them happen! Someone is going to buy/lease all that fiber especially with 5G about to utilize a bunch of fiber with the continued buildout. Good times are coming! While we wait I don't have a problem collecting all them dividends!
Long-Term Business Investor profile picture
@robert.becker Thank you for your insight about the extent of their fiber network. In addition to the fiber, CTL also has an extensive conduit network. The conduit network enables them to pull new fibers and upgrade technology at a much lower cost. Both fiber and conduit assets indeed are great assets that are hard to replicate. Agreed that 5G deployment will help them to grow their business, especially in Wholesales. Thanks for reading and thanks for your comments.
Jamjack profile picture
Yes robert, some of the best collection of that type of fiber assets anywhere under one corporate roof, couldn't agree more.
You are 100% correct about the conduit network. We have installed 100's if not close to 1000's of miles of extra conduit when we handle an initial project for CTL/Level3/Qwest. Level3 always had us add additional while we were handling a new install and I'll go one step further to say a lot of times when we were contracted to add just say a 144 strand fiber most of the time we would add (2) 144 strand fibers because it doesn't cost much to pull in the additional cable especially if you are already in market working. I know all over the northeast and southeast there is a lot of extra buildout available for CTL now and it was installed at minimal cost. Back in the 90's record keeping was not so great and I would bet CTL/Level3 and even old Qwest network has more capacity than what they show on paper because we always added extra conduit and fiber. We all saw the "light" back then!!!
Very well-written and thoughtful article and highlighted the potential a lot of us longs see. This is a severely undervalued company sitting on extremely valuable and expensive fiber assets. This is not a telecom company but in my eyes a technology company. If not for the legacy portion more people would be able to recognize the value of CTL and it would easily be a $25+ stock today. But in the meantime I'm getting paid a now safe (despite what others say) divi to wait.
Complaints about the dividend cut two years ago are becoming silly. It was the right thing to do and if it made you distrust management than don't invest in it. The fact is that this company is one of the few large businesses that has a low valuation (EV/EBITDA), a high and well covered dividend, substantial (several billion dollars) in fcf even post dividend, irreplaceable assets, growth opportunities in the US and LATAM, and a nice opportunity in FTTH and edge data centers. It is one of my biggest positions. CTL has more fiber in the US than anyone yet it is valued at less than 6x ebitda, while PE firms fall all over themselves to buy much less attractive fiber assets at 18x to 22x ebitda.
I agree 100% between CenturyLink and all Level3 fiber assets these guys have a bunch of fiber everywhere and it is not just concentrated in the United States. If you visit their website they have fiber routes in 175+ countries. My company builds their fiber networks inside their data centers, central offices and hubs and we also work on their fiber assets outside of their buildings. We have worked for Level3 on their network for the last 20 years. I have seen all the advances and we have participated in making some of them happen! Someone is going to buy/lease all that fiber especially with 5G about to utilize a bunch of fiber with the continued buildout. Good times are coming! While we wait I don't have a problem collecting all them dividends!
Long-Term Business Investor profile picture
@Justinthyme Very well said and great summary of the investment thesis for CTL. We will just have to wait for the other investors to see the true value of this company. Thanks for your comments and thanks for reading.
Jamjack profile picture
Thank you Jutinthyme....thank you!
scramyall profile picture
@long-term Business Investor - Thanks for your effort here, as well as for the fairness in your piece. I'll add only to your thorough analysis by pointing out P/B ratio today is merely .93, whereas CTL's sector normally carries P/B ratios of about 8X that..... Additionally, many of us long-term CTL investors can imagine COVID 19 may well accelerate the importance of global fiber- transmitted data, at least until an effective vaccination can begin suppressing the virus. Presently, only about 10K of the company's 42K employees go to an office.Thus, CTL may well serve as an economic tool countering negative impacts by the virus on large parts of the economy. Finally, on May 6, three new additions to CTL's Board should also answer some of the management issues you raised. As long-term investors, we also are hopeful of that.... Again, thanks for your analysis - and your fairness. Long CTL.
Long-Term Business Investor profile picture
@scramyall You are correct that P/B is another metric that highlights the valuation gap of CTL. You are correct that the pandemic will hasten the digital transformation of the economy and CTL will benefit from that transformation by providing the fiber and the services to enable that transformation. Network traffic has already increased significantly since Work-From-Home is the norm. Network traffic increase is a good leading indicator of increase in revenue. We will have to wait and see how quickly the digital transformation will benefit CTL. Thanks for your comments and thanks for reading.
scramyall profile picture
@Long-Term Business Investor - Hopefully, expanding the $16B government program will accelerate the "transformation."
I would not put too much faith, well actually ANY faith, in what the CEO and CFO say about the dividend. They have lied about it before and not that long ago. But what they are doing to deleverage and to exit no-growth business segments is smart management. If you are in the stock for the dividend be prepared to get hurt and shocked. If you are in it for the long term growth (I am cautiously optimistic) then just follow what management is doing by reading the numbers, where they have to actually be accurate.
Jamjack profile picture
Heard it must be about 700 times by now...Eyes rolling.....
scramyall profile picture
@Jamjack - Yeah, LOL. Fake News never seems to end....
ziaranch profile picture
Since the new management of this third rate telephone company is doing such a great job, would you please call them and ask them to fix our telephones that have been out of order for three weeks know. We have continually called their service department and can't get thru to them. We used to have good telephone service until these idiots bought out the previous owner and since then things have gone from bad to worse to non-working telephones. I would not own this stock even if you bought and paid for it and gave me the shares.
irsh profile picture
08 Jun. 2020
Hey, I'll take his shares if anyone is giving!
scramyall profile picture
@ziaranch -
I'd be delighted to phone CTL for you, as I've always had terrific results and very courteous treatment by CTL techies. OTOH, haven't had any need to phone lately, as my rural home system works perfectly.... I agree it must be terrible not to have reliable landline phone service, though you're one of the few folks I know to still have it. How's your Wi-Fi and Where are you located? PS: Love your dog, ZR. Must be great to have a pal like it around those wide open spaces....
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