CenturyLink investors got the shock of their investment lives last week after company executives announced the phone company was slashing its dividend by 26 percent from 72.5 cents to 54 cents per share. The stock immediately tanked, tumbling the most in more than three decades, according to Bloomberg News.

The stock price crash wiped out about $6 billion in market value after the dividend cut was announced and stock analysts lambasted executives for the decision.

But CenturyLink’s move to stop paying out large sums to investors does not mean the company is going to spend the money on network and service upgrades. Instead, CenturyLink executives plan to spend $2 billion in stock purchase buybacks over the next two years.

“This is one of the most unusual capital allocation decisions I have ever seen,”  Todd Rethemeier, an analyst with Hudson Square Research in New York told Bloomberg.

CenturyLink, like Frontier Communications and Windstream, have all been popular “investment-grade” stocks for investors that rely on dividend payouts. All three phone companies have paid extremely high dividends to attract shareholder investment, but the ongoing decline in revenue from landline customers disconnecting service has made high dividend payouts financially untenable. CenturyLink has lost six percent of its landline customers in the 12 months ending last September, a decline of 857,000 lines. In the last two years, the dividend payout has cost CenturyLink 50-55 percent of its free cash flow. That is unsustainable at a time the company is losing upwards of $25 million in operating revenue every quarter.

From: Seeking Alpha

CenturyLink executives told shareholders in the company’s latest quarterly conference call that much of CenturyLink’s investment will continue to build fiber links to serve highly profitable cell towers. The company also plans to further expand its fiber-to-the-neighborhood service Prism, which works similarly to AT&T’s U-verse. Phoenix, Arizona is the company’s next major target for rollout, with the service already soft-launched in certain neighborhoods. But do not expect CenturyLink to begin a spending spree to expand Prism rapidly into other communities, even if it means losing more landline customers.

The Minneapolis Star-Tribune reports CenturyLink, the city’s primary phone company, is now in a race against time in a country where more than a third of Americans rely on cellphones — a service CenturyLink does not provide. In response, CenturyLink has relied on its multi-platform Prism service, which can provide phone, broadband, and cable-TV in its bid to stay relevant and help improve earnings growth. The company also sees corporate customers as a major income source, and has expanded into the business of cloud computing with its acquisition of Savvis.

But the company has a more immediate potential challenge. The Communications Workers of America (CWA), the union representing as many as 13,000 CenturyLink employees, has authorized its executive board to set a strike date. The company’s labor contract expired in October and bargaining has yet to achieve a renewal. Workers are complaining about significant benefits cuts, especially to health care plans.

A CenturyLink official made a remarkable concession in the state of Minnesota last week when he admitted the state’s community-owned broadband networks are better equipped to deliver 21st century broadband speeds that CenturyLink simply cannot provide.

Duane Ring, midwest region president for CenturyLink publicly told an audience at a Minnesota High Tech Association-sponsored discussion in Minneapolis that community-owned networks don’t have to meet shareholder demands for return on investment and other corporate metrics that have left CenturyLink broadband customers with far lower speeds than municipal broadband customers. Minnesota Public Radio was on hand:

Noting that CenturyLink wants every customer it can find, Ring pointed out that the company nonetheless needs a return on investment that satisfies shareholders and meets the demands of larger commitments and fiduciary responsibilities.

The small phone companies that have laid high-speed fiber networks, some of whom are cooperatives whose customers are the owners “can make decisions that maybe the economic return is 25 years,” Ring said. “They can do that.”

CenturyLink concedes Paul Bunyan offers better speeds over a superior network.

Only 62 percent of Minnesotans can today purchase what qualifies as broadband service. Those lucky enough to be served by public providers like Paul Bunyan in the Bemidji area and Farmers Mutual Telephone in western Minnesota benefit from some of the fastest broadband speeds in the state. That is because those cooperatives and public ventures laid fiber optic cables connected to individual homes. Those in rural Minnesota served by CenturyLink or Frontier get much less from slow speed, copper-based DSL, if they can get broadband at all.

CenturyLink has proven itself an obstacle for community broadband, opposing the construction of improved networks in areas they already service, condemning rural customers to substandard broadband speeds indefinitely. While the company says it is not opposed to public-private partnerships, any attempt to bypass them will result in a hornet’s nest of legal protests and blocking actions.

While community-owned networks struggle for financing and approval in a hostile atmosphere created by incumbent providers, the government is handing out money to companies like CenturyLink to get them to extend their slow speed DSL network. CenturyLink is spending $11 million in Connect America funds in Minnesota alone.

In other areas, residents have no interest in waiting around for single digit DSL speeds. In Lac qui Parle County in western Minnesota, local officials have joined Farmers Mutual Telephone to build a fiber network.

CenturyLink’s admission proves it answers first to shareholders, much later to customers.

The business community of Poulsbo, Wash., a Seattle suburb of 9,000 in Kitsap County, is fed up waiting around for CenturyLink and Comcast to increase broadband speeds in the area so several have joined forces to share the city’s underused, existing fiber-optic cables to offer free Internet access for area businesses and residential users.

The Kitsap Public Utility District has launched a public-private partnership that offers free wireless mesh antennas to businesses willing to host them and pay any power costs incurred, so long as they agree to let customers and others in range of the network use it at no charge. The wireless mesh technology, more robust than traditional Wi-Fi, costs the public utility district between $7,000-$12,000 per site, but the resulting wireless coverage is cheap compared to wiring individual homes and businesses with fiber.

Local businesses, community leaders and the public consider it a win-win for everyone, especially because the existing institutional fiber network already in place is underutilized. The comparatively inexpensive wireless technology has not created any significant issues for area taxpayers or ratepayers, which effectively underwrite the antenna purchases, installation, and maintenance.

The wireless network offers speedy connections — as much as six times faster than the current broadband speeds sold by Comcast and CenturyLink in the county.

So far, four antennas have been installed downtown at local restaurants and a Lutheran church.

Stephen Perry, the PUD’s superintendent of telecommunications, says the new network is a pilot program to test if an economic model can be created to sustain the service and eventually expand it.

“The whole idea was to have it be a community network. It’s community based and owned so to have the community step up and want to take ownership of it … thought we’d have to force it on people,” Perry told the Kitsap Sun, noting district workers “can’t go fast enough” responding to fiber-optic interest.

The surprising support from the local business community has helped drive the project and publicize it. Local businesses love the new service, which they consider more reliable than paying for and maintaining a Wi-Fi network and Internet connection from Comcast or CenturyLink. The service does not require a password or complicated setup to access and has proved more reliable than older Wi-Fi solutions. Customers also enjoy the higher speeds.

Ed Stern, a member of the city council, said wireless mesh technology represents a major improvement over traditional Wi-Fi.

“It’s not a typical ‘hot spot’ limited to that business or specific location, but rather like ‘umbrella’ coverage, in that the antennas join together to create seamless coverage of everything and everybody throughout the area,” Stern said, adding network expansion is now inching into residential neighborhoods as well. “It’s really exciting.”

With countless towns and cities equipped with underutilized institutional fiber broadband networks lacking money to install direct fiber connections to homes or businesses, the wireless mesh option can offer an affordable introductory solution to expand service, publicize the community broadband initiative, and build support for even more ambitious public broadband opportunities in the future.

One local resident told the newspaper it was about time.

“The privatization business model has proven a failure,” wrote one reader. “Kitsap PUD needs to offer retail broadband to residents and businesses. These fiber cables are just sitting there doing nothing. There is one at the end of my driveway, but no one will sell me the service. Why would CenturyLink bother when they can continue to get overpaid for very slow speeds. In most places, there aren’t choices.”

CenturyLink CEO Glenn Post does not think much about AT&T’s plans to shift its most rural landline customers to wireless in its efforts to decommission traditional landline service.

“From a regulatory standpoint, that could be a tough go,” Post explained to Wall Street investors on a conference call last week. “There may be some areas that will have better service with wireless in some ways. As far as a competitive threat, we don’t see that being a real issue for us because just the bandwidth requirements and the limited wireless access or capability in a lot of areas.”

CenturyLink, one of four large independent phone companies and owner of former Baby Bell Qwest, is doubling down on its wired infrastructure to reach customers. The company recently announced Phoenix would be the latest city to get its fiber-to-the-neighborhood service Prism TV — the first legacy Qwest market to get IPTV service from CenturyLink. The service soft-launches in Phoenix this month, with a second city in the region or Pacific Northwest slated to get Prism sometime next year.

The company has spent much of 2012 investing in broadband, managed hosting and cloud computing for business customers, and fiber expansion to reach more than 15,000 cell towers across CenturyLink’s national service area, depicted in green on the accompanying map.

But CenturyLink executives stress their investments are “strategic” — made in areas that are most likely to deliver quick returns for the company.

While CenturyLink spends money to secure video franchising agreements in metro Denver and Colorado Springs for Prism TV service, it is moving at “a snail’s pace” to deliver broadband service in northeastern North Carolina’s Northampton County. County officials there anticipate CenturyLink will take years to deploy basic DSL service to communities outside and around Conway and Gaston.

The broadband problem in income-challenged parts of North Carolina illustrate the conundrum for county officials, who have to advocate for broadband improvement while combating misleading broadband maps that suggest access is not a problem in the state.

Donna Sullivan with the Department of Commerce notes that broadband maps in states like North Carolina have a census block granularity which does not always reveal the true picture of broadband availability.

“That means if one household in that census block can receive broadband services, the entire census block is considered covered—even though there very well may be households who cannot receive broadband to that location,” she told the Roanoke-Chowan News-Herald.

Northampton County, N.C.

CenturyLink is in no hurry to expand broadband to the 1,921 households in the county of 22,000 who cannot buy broadband service at any price.

Derek Kelly, a CenturyLink spokesman, said the company is working to expand broadband services in the region, but noted the costs to lay down a fiber network to help reach the unserved is “one of the largest costs.”

That cost is much less of a problem if the customer at the end of the line happens to be a wireless company like Verizon or AT&T.

Company officials admit they are spending enormous sums “investing in fiber builds to as many [cell] towers in our service area as economically feasible.” In the third quarter alone, more than 1,000 cell towers received fiber upgrades for a total of 3,300 so far this year. The company hopes to reach 4,000-4,500 cell towers by New Year’s Eve.

The reason why CenturyLink chases wireless business while allowing rural and income-challenged service areas to go without broadband is a simple matter of economics. Cell phone companies sign lucrative, multi-year contracts for fiber connectivity to cell towers to support forthcoming 4G service. In contrast, CenturyLink was surprised to find an astounding 94 percent of families with children in Northampton are qualified for the company’s special Lifeline Program which delivers slow speed, discounted broadband service for families on public assistance.

Post

For CenturyLink’s more urban and prosperous service areas, the news for broadband service improvements is better.

As CenturyLink continues to extend its middle mile fiber network, broadband speeds are gradually improving.

Over 70 percent of CenturyLink customers can receive at least 6Mbps DSL service, more than 57% can receive at least 10Mbps and 29% can access the Internet at 20Mbps speeds or better, according to Post.

But the more urban and prosperous a service area is, the greater the chance a cable competitor has successfully poached many of CenturyLink’s DSL customers with the promise of better speed.

Post said he recognizes the company must do better to remain competitive.

“We’re shooting for 20-25Mbps for a very large percentage of our areas,” Post said. “But with [pair] bonding, we can virtually double the broadband capacity and speeds in our markets. We’re already doing bonding in a number of markets today. So where we have 20Mbps, we could have 40Mbps.”

CenturyLink’s fiber to the neighborhood network, essential where it plans to roll out Prism TV, can also support faster broadband speeds if a customer wants broadband alone and does not care about television service.

Nationwide, the company added 10,000 Prism TV subscribers in the third quarter and has a total customer base of around 104,000 subscribers. But that represents a penetration rate of just over 10%, hardly noticed by still-dominant cable operators.

CenturyLink executives were asked to comment on AT&T’s strategic plan to transform their landline network announced last week in New York. Post found little in common between CenturyLink and AT&T’s vision for the future and does not think the company has to respond to AT&T’s attempt to redefine rural America as wireless territory.

“We don’t see that as a major investment for us or a major risk at this point.”