Lumen Technologies: 7% Yield, Lower Debt, Undervalued Vs. Peers
- LUMN yields 7.6%, with a 40% free cash flow payout ratio.
- It's cheaper vs. Telecom industry averages on P/E, P/Book, P/Sales, and EV/EBITDA bases.
- Interest expense fell by 17% in 2020, and management paid down 9% of debt.
- There are also 2 high yield options trades at the end of this article.
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Lumen Technologies (NYSE:LUMN) was formerly known as CenturyLink, a legacy telecom which has been transitioning into data services, in order to battle landline attrition. Management has invested in fiber cable assets, as a part of this transition, and has entered the data center business. LUMN provides various communications services to residential, business, wholesale, and governmental customers in the US and internationally.
"It offers IP and data services, including VPN data network, Ethernet, internet protocol (IP), and content delivery services. The company also offers transport and infrastructure services comprising high bandwidth optical networks; unlit optical fiber networks, and related professional and management services; private line services, a direct circuit or channel specifically dedicated for connecting two or more organizational sites; colocation and data center services."
Source: Company resources
In addition to its cord-cutting challenge, which all legacy telecoms have been battling for years, LUMN also has a big debt load, which management has been paying down over the past 2 years.
They reduced the debt load by 9.21% in 2020, and by nearly 17% over the past 2 years; refinancing ~$13 billion in long-term debt in 2020. Interest expense fell -17.47% in 2020, and by -23.38% over the past 2 years. Those falling interest rates can also have a dynamic effect on big debt loads.
In terms of LUMN's debt ladder, management pushed ~$15B in 2021-2025 debt maturities out to 2026 and beyond:
LUMN's 5 segments are Enterprise, 28% of revenue; Consumer, 25% of revenue; Wholesale, at 18%; iGAM, at 17%; and Small Business - SMB, at 12%:
Total revenue was down -3.4% in Q4 '20, with the small business segment off by 7.1%, and the wholesale down 6.2%, due to pandemic pressures. Consumer fell 4.1%, while iGAM was down 1.6%, and Enterprise was flat:
For full year 2020, revenue and EBITDA held up fairly well, down just -5% and -3.2%, respectively. Free cash flow fell -8.42%, while net income, although still negative, had a big improvement vs. 2019, as did adjusted EPS, up 26.5% vs. 2019:
Q2 2020 was the nadir for many companies in 2020, with the pandemic lockdowns in full swing, and LUMN was no exception. However, it wasn't a drastic dip - adjusted EBITDA fell 3%, and EBITDA margin slipped 100 basis points, to 41.9%. By Q4 '20, both had reached or surpassed Q4 '19 levels. For the full year, EBITDA margin improved from 42.3% to 42.9%:
Like many other companies in 2020, LUMN had big non-cash impairments, at $2.6B, although they were much lower than 2019's $6.5B total. It also has large non-cash depreciation and amortization each year, $4.7B in 2020, due to its heavy asset load:
With pandemic uncertainty still clouding the picture in the first half of 2021, we're seeing many companies issuing flat or somewhat lower 2021 guidance. Adjusted EBITDA is expected to flat or down -3%, while free cash flow is forecast to be flat or down by -6%.
On a positive note, though, management intends to maintain the current dividend, and, even at the low end of its free cash flow forecast, LUMN should have a reasonable ~39-40% Free Cash Flow/Dividend Payout ratio.
Another bright spot is that interest expense will continue to decline -3% to -6% in 2021:
New Segment Reporting Changes:
Management is reorganizing LUMN's business segments. High potential customers are being moved from Enterprise to the iGAM segment, while mid-sized ones are being shifted to a new segment, Mid-Market Enterprise.
The SMB small business and Consumer categories will be folded into a Mass Markets segment:
The net result of these shifts is that LUMN's consumer business will no longer be a separate segment, as it and small business are folded into a Mass Markets category, which represented 28% of LUMN's Q4 '20 revenue, with the Business category representing the other 72%:
Business product categories will also shift in the new Lumen platform.
Management cut the quarterly dividend from $.52 to $.25 in Q1 '19, in order to focus on more debt repayment, hence the -10.74%, 5-year dividend growth rate.
LUMN pays in a March/June/Sept./Dec. schedule - it should go ex-dividend next on ~5/28/21.
On an adjusted EPS basis, LUMN's dividend payout ratio improved from 75.76% in 2019, to 59.88% in 2020, while on a free cash flow basis, it was slightly higher in 2020, at 39.68%, vs. 36% in 2019. Both payout ratios are reasonable, and afford management enough cash flow to keep paying down that big debt load.
Profitability & Leverage:
The big impairment charge in Q4 '20 sent LUMN's ROA and ROE into the red - no joy there. Its EBITDA margin of 40.99% was slightly lower, but still much higher than other large cap telecoms' 32.29% average.
LUMN's Debt/Equity leverage was lower than industry averages as of Q4 '20, LUMN's Net Debt/EBITDA leverage improved quite a bit in 2020, dropping from 3.97X as of 3/31/20, to 3.6X as of the year-end. It's still much higher than the industry average of 2.19X, but it's headed in the right direction - management reduced net debt by ~$1.6 billion in 2020, and has a target leverage ratio of 2.75 to 3.25.
While LUMN has lagged the S&P over the past year's bounce off of the COVID crash lows, it has greatly outperformed the S&P and the iShares U.S. Telecommunications ETF (IYZ) in 2021:
Analysts' Price Targets:
Analysts' price targets for LUMN have a wide range of $7.00 to $15.00. Its price performance has outdistanced analysts' price targets. This is something we're seeing a lot of in 2021 - the price targets haven't been reassessed or kept pace with price performance.
So, at $13.11, LUMN sits 30% above the average $10.08 price target.
With a trailing P/Adjusted EPS of 7.85, LUMN looks much cheaper than the 19.78 telecom average. Its forward non-GAAP P/E is ~8.55, vs. a sector average of 19.52.
LUMN's 1.27X Price/Book is ~66% cheaper than the telecom industry average of 3.69X, while its EV/EBITDA of 5.2X is less than half of the industry average. Its .68X Price/Sales is also 86% lower than the industry's 4.8X average.
Like many of the other stocks we cover in our articles, LUMN has attractive options-selling premiums.
We just added these 2 options-selling trades to our Covered Calls Table and our Cash Secured Puts Table, where you can see more details.
Covered Calls - LUMN has a July $14.00 call strike, with a bid of $.75, which, combined with the $.25 May dividend, offers you a 7.6% nominal yield in ~3.5 months, or 26.27% annualized.
The $14.00 strike is $.89 above LUMN's $13.11 price/share, so if your LUMN shares get assigned before the May ex-dividend date, you'd forego the $.25 dividend, and have an $.89 capital gain instead:
If you're angling for a cheaper entry point, LUMN also has a $12.50 July put option, which pays $.94. It's a 7.5% yield, similar to the call yield, or 25.89% annualized. The breakeven is $11.56, which is ~15% above the $10.08 average target price, but much lower than the $15.00 highest target price.
NOTE: Put sellers don't receive dividends, we include them in our tables so that viewers can compare them to the options premiums. We use annualized yields in our options tables, so users can compare trades of varying lengths.
All tables furnished by DoubleDividendStocks.com, unless otherwise noted.
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This article was written by
Robert Hauver, MBA, was VP of Finance for an industry-leading corporation for 18 years, and publishes SA articles under the name DoubleDividendStocks. TipRanks rates DoubleDividendStocks in the Top 25 of all financial bloggers, and Seeking Alpha rates us in the Top 5 of several categories, including Dividend Ideas, Basic Materials, and Utilities.
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Analyst’s Disclosure: I am/we are long LUMN. 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.
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