Lumen Technologies Stock: A Buy For Its High Yield (NYSE:LUMN)

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Lumen Technologies (LUMN) has dropped more than 20% in the last three days after the company’s EBITDA and free cash flow forecasts for 2022 disappointed investors. The stock is now oversold, and the market’s reaction to Lumen Technologies’ outlook is likely exaggerated. The telecom company’s dividend is comfortably covered by free cash flow and has been reaffirmed.

Correction Translates Into Buying Opportunity

Lumen Technologies is one of a growing number of companies that have been punished by investors this quarter due to poor performance.

According to Lumen Technologies’ earnings report, the telecom company lost 5.4% of its revenue YoY in the fourth quarter due to a challenging market environment. Revenue for 4Q-21 was reported at $4.85 billion, a decrease from $5.13 billion in the previous quarter. Sales were also down QoQ and across all sales channels, indicating that the company is still facing significant revenue headwinds in its industry.

Lumen Technologies Sales Channels

Sales Channels (Lumen Technologies)

However, earnings improved, with the report revealing a net income of $508 million, or $0.50 per share, for the fourth quarter of the year. The telecom company reported a net loss of $2.29 billion, or $2.12 per share, in 4Q-20. After adjusting for special items, net income for 4Q-21 was $522 million, or $0.51 per share.

Lumen Technologies had adjusted net income of $453 million, or $0.42 per share, in the prior quarter. Lumen Technologies’ net income increased by 21% YoY on an adjusted per-share basis. The $0.51-per-share figure fell two cents short of the consensus estimate of $0.53.

However, EBITDA and free cash flow performance was strong, owing largely to lower corporate expenses. Cost cuts resulted in a higher EBITDA margin in the fourth quarter. Lumen Technologies’ adjusted EBITDA margin increased by 0.6 percentage point over the previous quarter, at least partially offsetting the quarter’s negative revenue effects.

Lumen Technologies - Quarterly Performance - Revenue, EBITDA, EBITDA margin

Quarterly Performance (Lumen Technologies)

More importantly, Lumen Technologies’ free cash flow remained strong in the last quarter. The company generated $776 million in free cash flow in the fourth quarter, adjusted for special items, and $3.74 billion in 2021. Lumen Technologies increased its free cash flow by 26% YoY compared to 2020, owing to improved execution and cost discipline. The main reason to invest in Lumen Technologies is its excellent free cash flow, which more than covers the dividend payout.

Lumen Technologies previously forecasted adjusted EBITDA of $8.4 billion to $8.6 billion and adjusted free cash flow of $2.8 billion to $3 billion. In terms of free cash flow, Lumen Technologies finished the year much stronger than expected, compared to the company’s previous guidance.

Lumen Technologies’ free cash flow will be impacted by asset sales in the future. In 2021, the company divested its Latin American assets as well as its local incumbent carrier operations in twenty Midwest and Southeast states, resulting in a smaller business footprint. Lumen Technologies anticipates $7 billion in after-tax proceeds from these divestitures in 2022.

These funds could be reinvested in Lumen Technologies’ business, used to fund growth initiatives, or returned to shareholders through stock buybacks, which the company has done on a regular basis. In 2021, the telecom company used $2.1 billion of its free cash flow to pay dividends and buy back stock.

Looking Ahead: Outlook For 2022

To put it mildly, the outlook for the current fiscal year is bleak. This year, Lumen Technologies will continue to restructure its telecom business and sell assets in order to streamline operations. As a result, the company anticipates a decrease in adjusted EBITDA and free cash flow. EBITDA is expected to fall 22% Yoy, while free cash flow is expected to fall 55% to a range of $1.6 billion to $1.8 billion due to ongoing restructuring and asset sales. Lumen Technologies is now undervalued on an FCF basis, based on the free cash flow guidance for 2022, which implies an FCF multiple of six.

On the plus side, the company has stated that it will continue to pay out $1 per share. The dividend costs the company between $1.0 billion and $1.1 billion per year, with the final bill determined by the amount of stock repurchased. Because Lumen Technologies expects to receive proceeds from asset sales this year, the company could return a significant portion of the expected $7.0 billion through stock buybacks.

Lumen Technologies Outlook

EBITDA (Lumen Technologies)

The Yield Exploded To 10%

Lumen Technologies’ stock has become significantly cheaper as a result of the sell-off, and the stock yield has risen to 10%. Lumen Technologies, on the other hand, is not a bet on business expansion. Instead, it is a high-yielding play. Lumen Technologies is expected to cover its dividend with free cash flow this year as well, based on guidance for 2022. According to the RSI, the stock is technically oversold, implying at least a partial gap close in the coming weeks or months.

LUMN Stock Yield

LUMN Stock Yield (Stockcharts)

My Conclusion

Lumen Technologies is restructuring its telecom business and selling assets, which has affected adjusted EBITDA and free cash flow guidance for 2022, but this should not have surprised investors. Lumen Technologies is also more than just a turnaround play. The stock is undervalued at 6x free cash flow based on free cash flow guidance of $1.7 billion, and the stock yield of 10% should be covered by free cash flow. LUMN has recently become a strong buy for long-term dividend investors.

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