Why Your Portfolio Needs More Fiber
When I was young, I didn’t understand why old folks didn’t want to keep up with the times.
Back in the early ‘90s, I was a voracious consumer of media. And I assumed I would always be in touch with the latest trends.
Now that I’m in my early forties, I’m proudly ignorant of most pop culture.
In fact, my wife recently had a good laugh when I assumed Taylor Swift was a man. Sorry, I just don’t care anymore!
I’ve also got a bad attitude about adapting to new technology.
Sure, I love my smartphone. But I hate the never-ending upgrades—and the feeling of perpetual obsolescence.
But as an investor, I would love to profit from the trends I despise.
Unfortunately, the very companies that are foisting these changes upon us are having a hard time keeping up with what they’ve wrought.
While the stock market is up nearly 18% so far this year, the telecom sector has fallen 12%. That’s a performance gap of around 30%!
Keep Up Keepin’ Up
There are two major investment themes that have shaken the wireless giants this year.
For one, they’re about to enter the fifth year of a brutal price war.
The U.S. wireless industry has matured, and the days of heady growth are over. Now it’s all about sacrificing profit margins for market share.
Not only are the Big Four in a race to the bottom to win new customers, they’re also facing new competition from cable giants who want in on the game too.
Of course, that’s only fair. The two market leaders—Verizon (NYSE: VZ) and AT&T (NYSE: T)—are already in the cable business in a big way, themselves.
Unfortunately, that’s given them exposure to this year’s other major investment theme: cord-cutting by cable customers.
With the ability to stream video over the Internet, the old set-top cable box no longer dominates our leisure time.
Indeed, I’ve also stopped caring about having the latest TV. I’ve still got one of those giant humpback televisions from the pre-flatscreen era.
That’s because I no longer actually watch TV on a TV. I watch it on a laptop.
Even while the telecom giants grapple with all these changes, they still have to invest in building the next generation of wireless networks.
The goal is to be able to offer wireless data hogs the ability to download a gigabit per second. Of course, with the explosion of streaming video, we’re all data hogs now.
But with unlimited data and gigabit-per-second download speeds, you won’t have to wait until you’re on WiFi to watch a video anymore. In the near future, your phone will be able to download a full movie in a matter of seconds.
The demands of the new fifth-generation wireless networks (5G) are causing telecom players to rediscover wire—not copper, but fiber-optic cable.
During the Dotcom Boom, telecoms invested in a huge fiber build-out. They laid about $90 billion worth of fiber, only to see demand for capacity vanish amid the bust.
Twenty years later, the advent of 5G has spurred a new round of deal-making for once-dormant fiber networks. Fiber offers the crucial backbone for delivering blazing download speeds.
This year alone, Verizon has spent more than $2 billion buying fiber assets.
And smaller players are spending similar amounts and even more in some cases. These deals are further concentrating fiber assets into fewer hands.
In recent years, Colorado-based Zayo (NYSE: ZAYO) has made four fiber deals. The $8.5 billion company has spent almost $2 billion to acquire nearly 28,000 miles of fiber.
Earlier this year, Windstream (NSDQ: WIN) bought EarthLink for $1.1 billion, gaining 29,000 miles of fiber.
In July, Consolidated Communications (NSDQ: CNSL) acquired another troubled telecom, FairPoint Communications. The $1.5 billion deal added 21,000 miles of fiber to its holdings.
And the biggest deal of them all was CenturyLink’s (NYSE: CTL) $34 billion takeover of Level 3 Communications, for 200,000 miles of fiber.
Double, Double, Toil and Trouble
Unfortunately, in most of these cases, the acquirer already sported a crushing debt burden that each deal only made worse.
Consolidated and CenturyLink’s deals may generate the cash flows necessary to kick the can down the road one more time.
But former high-yield darling Windstream is in a high-stakes showdown with a hedge fund over whether it’s defaulted on its debt.
All three stocks have fallen sharply this year.
The deal-happy Zayo doesn’t exactly boast the best credit either.
But it also doesn’t have the high-dividend baggage of the three legacy telecoms. So far this year, its stock has delivered a modest gain.
Regardless, all four firms could conceivably be affordable for the $200 billion wireless behemoths.
With 450,000 miles of fiber, CenturyLink has the single biggest hoard of fiber among these names.
But even after its selloff, CenturyLink’s total value is close to $40 billion. So not exactly chump change.
While Zayo commands a premium compared to its troubled peers, it’s still relatively bite-sized.
And its 126,000 miles of fiber won’t come with as many potential headaches as the others. But it also doesn’t pay a dividend.
For income investors, there may be another way of playing fiber without having to bet on companies in danger of going bust.
Crown Castle International (NYSE: CCI), a REIT that specializes in cell towers, has expanded into fiber.
Following a deal earlier this year, Crown Castle now owns or has rights to 60,000 miles of fiber. And it’s big enough to scoop up Zayo or one of the others.
Equally important, Crown Castle has been rapidly growing its quarterly distribution. Its payout now yields 3.8% on a forward basis.