Like many other traditional telecoms, Lumen Technologies, Inc. (NYSE:LUMN) has been moving into other business offerings over the past few years in order to fight the attrition associated with traditional landline service. Management has expanded fiber optics, multi-gig services, and other architectures in an accelerated pace, which it sees as positioning LUMN for growth coming from Virtual Reality, AR, gaming, work and learn from home and other high-bandwidth services.
As we've written in our previous articles on LUMN, another of its big challenges is working down its debt load, which was $35B-plus in 2018.
LUMN's debt stood at $28.4B as of 3/31/22, ~19% lower than its 2018 total. It declined by 6.7% in 2021, but had a ~3% rise in Q1 '22. Interest expense continued to decline in Q1 '22, dropping 9.5%, after an 8% decline in 2021.
Management reduced net debt by over $450M in Q1 '22.
LUMN has minimal debt maturing in 2022, $94M, whereas in 2023 it will have $949M maturing, followed by $1.125B in 2024, and ~$4B in 2025. LUMN hired a new CFO in April 2022, Chris Stansbury, an exec with 30 years financial experience at companies such as Arrow, Hewlett Packard, and Pepsi.
Q1 '22 revenue fell -7%, Adjusted EBITDA was down -11.3%, while Free Cash Flow slipped just -1.36%. However, Net Income rose 26%, and Adjusted EPS rose 34%.
Management made previously announced changes to the product categories in Q1 2022 to better align financial reporting with how management and investors view the business. These changes include the creation of new product categories: Fiber Broadband, Other Broadband, and Voice and Other, which now includes support revenue.
Fiber Broadband rose ~19%, whereas Other Broadband fell ~6%, and Voice & Other fell ~22%:
Like many other companies, LUMN's Enterprise and Mass Markets segments are managing through supply chain constraints, and experienced year-over-year and sequential declines in Q1 2022:
LUMN's legacy Voice & Other products continue to be less important in its Enterprise Channel mix, with Core products rising to 79% of revenue, vs. 77.3% in Q1 '21, and 75.7% in Q1 '20.
Large Enterprise, which is a longer sales cycle, had the biggest declines in Q1 '22, at 5,8%, while International GAM fell 2.5%, and Mid-Market Enterprise fell 1.7%.
While Adjusted EBITDA was down again in Q1 '22, LUMN's EBITDA Margin has been relatively stable over the past 5 quarters, running from 41% to 41.6%, excluding CAF subsidies.
CAF 2 - the Connect America Fund, is a part of the Universal Service High-Cost program – is an FCC program designed to expand access to voice and broadband services for areas where they are unavailable. Through CAF Phase II, the FCC provides funding to service providers to subsidize the cost of building new network infrastructure or performing network upgrades to provide voice and broadband service in areas where it is lacking. (FCC site)
On the Q1 '22 earnings release this week, management raised its 2022 guidance for Adjusted EBITDA range to $6.9B - $7.1B, vs. the previous $6.5B - $6.7B. They also raised the 2022 Free Cash Flow guidance range to $2 - $2.2B, up 25% vs. the previous $1.6B - $1.8B range.
Of key interest to income investors, Management committed to maintaining the current $.25 quarterly dividend in 2022.
At $10.77, LUMN has a dividend yield of 9.31%, one of the higher yields we've covered in our articles.
It should go ex-dividend next on ~5/27/22, with a ~6/10/22 pay date. Management cut the quarterly dividend from $.52 to $.25 in Q1 '19, in order to reallocate more cash toward debt repayment, hence the -10.74% 5-year dividend growth rate.
We looked at LUMN's dividend coverage 2 ways - on an Adjusted EPS basis, and a Free Cash Flow basis.
The Adjusted EPS dividend payout ratio improved 25% in Q1 '22 to 42.37%, vs. 56.82% a year ago, as did the FCF payout ratio, which improved to 34%, vs. 36.34% in Q1 '21.
Those better payout ratios follow the success LUMN had in 2021, when its EPS dividend payout ratio improved by 52%, and its FCF payout ratio improved by 24%:
We compiled a table comparing LUMN's profitability & leverage to its biggest telecom competitors, AT&T (T). As we noted earlier, telecoms are changing their product mix, so comps aren't totally apples to apples.
LUMN's ROA is in the bottom tier of this group, while its ROE is much better. Although management has decreased debt leverage, LUMN's figures are still on the high side, compared to these other telecoms.
However, its Interest coverage is strong - the 3rd best in the group.
LUMN has by far the lowest trailing P/E in the group, at 5.21X, the lowest EV/EBITDA, at 4.59X and the 2nd lowest P/Book, at .89X, just above T's .86X figure. Its 9.31% dividend yield is by far the highest yield in the group.
LUMN has lagged the S&P 500 over the past year, quarter, month, and thus far in 2022; and has lagged the Telecom industry over the past year, quarter, and in 2022, while outperforming it in the past month.
LUMN appears to have garnered some defensive allure this week, having gained ~2% over the past 2 days' -4% market pullback.
It has been a long, painful haul for long term LUMN shareholders, who have seen it fall from the mid-$40's in its CTL days down to below $9.00 in 2020. Shorter term investors, in since ~Q4 '20, have had a better ride.
At its 5/4/22 closing price of $10.74, LUMN was 34% above the lowest price target of $8.00, and 2.3% above the average $10.50 price target. Its most recent analyst upgrade was in November 2021, when Citigroup raised it from Sell to Neutral, with a $13.00 price target.
We continue to rate LUMN a speculative BUY, based upon its attractive yield, steady dividend, improving debt metrics, undervaluation vs. its industry, and its reasonable dividend coverage.
Yes, there wasn't a lot of great news in the Q1 '22 earnings report, but, as we've noted previously, turning around a Telecom is a bit like moving the Queen Mary - it's long process, with many moving parts. As we've seen this week, there will be bumps along the road for LUMN, so don't bet the ranch on it.
The asset sales of the Latin American and US businesses will be a cash flow tailwind of LUMN in the 2nd half of 2022 - management expects about $7B in discretionary cash proceeds from the transactions after the transfer of debt, taxes and transaction-related costs.
All tables furnished by Hidden Dividend Stocks Plus, unless otherwise noted.
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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Disclosure: I/we have a beneficial long position in the shares of LUMN either through stock ownership, options, or other derivatives. 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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