Lumen Technologies Inc. (NYSE: LUMN) continues to face pressure in its historical business, resulting in a 6.3% decline in sales year-on-year.
That said, Lumen continued to cover its generous dividend payout with free cash flow. and reaffirmed its guidance for 2022 based on adjusted EBITDA and free cash flow.
The stock is trading at an attractive free cash flow multiple, and the company is poised to become a catalyst that could propel the stock price higher.
Orientations reiterated for 2022
Lumen Technologies reiterated its 2022 adjusted EBITDA and free cash flow guidance, which remains unchanged at $6.9 billion to $7.1 billion in adjusted EBITDA and $2.0 to $2.2 billion dollars of free cash flow. The reaffirmation of Lumen Technologies’ guidance is excellent as investors have been concerned about the sustainability of the company’s dividend payout.
Because AT&T (T)was not covered by free cash flow, the question was whether Lumen Technologies could still collect its payment.
Lumen Technologies generated $668 million in free cash flow in 2Q-22, which exceeded the company’s dividend payouts by $260 million. Despite Lumen Technologies’ business challenges, the free cash flow payout ratio was only 39%, indicating that the company’s dividends are quite secure.
Lumen Technologies’ generous quarterly dividend of $0.25 per share, which costs the company just over a quarter of a billion dollars every three months, is funded by free cash flow. Lumen Technologies expects to pay approximately $254 million in quarterly dividends going forward, based on the number of shares currently outstanding.
Lumen continues to have a very attractive valuation
With $2.0 billion in free cash flow expected in 2022, the stock is trading at a multiple of 5.6x free cash flow, which is attractive given that the telecommunications company is covering its dividend with free cash flow.
Additionally, Lumen Technologies is reducing free cash flow risk by paying down debt, which relieves pressure on free cash flow due to lower interest expense.
Lumen Technologies will need to do more to settle its large debt load, but it will help the company reduce interest costs in the future. Lumen Technologies had $28 billion in long-term debt at the end of the second quarter, about half a billion less than at the end of 2021.
Having $28 billion in liabilities is not pocket change for a company whose total market value is only around $11 billion. Lumen Technologies prioritized debt repayment and the company reduced its net debt by $900 million in the first two quarters of 2022.
Lumen Technologies’ interest charges have also declined significantly in recent quarters, but more needs to be done to create a sustainable balance sheet for the telecommunications company.
Catalyst: $7 billion in cash
Lumen Technologies will sell two businesses in 2021: its local incumbent carrier operations in twenty Midwest/Southeast states and its commercial operations in Latin America.
Both transactions recently cleared significant regulatory hurdles (see here and here), paving the way for Lumen Technologies to receive a large cash injection.
Lumen Technologies will receive $7 billion in proceeds from the sale of assets, which will be used for a variety of business purposes, including accelerated debt repayment and investments in Lumen Technologies’ quantum fiber operations, which are driving the robust growth of the number of company subscribers.
Lumen Technologies’ quantum fiber operations added 25,000 new subscribers to 2Q-22, so this is definitely an area where management may want to invest more money in the future. Lumen Technologies expects proceeds from asset transactions to appear on its balance sheet within the next five months.
Why Lumen Technologies shares could fall
The problems of selling Lumen Technologies’ legacy business won’t go away overnight. To ease the pressure on free cash flow, the telecommunications company must either aggressively pay down more debt, which it has already begun to do, or invest aggressively in its fastest growing segment, the quantum fiber.
Lumen Technologies’ balance sheet is still far too leveraged and interest charges are weighing on earnings and free cash flow.
Lumen Technologies is a telecommunications company that, like the rest of the industry, is experiencing slow or negative sales growth in its legacy business, while the fiber/broadband segment offers opportunities for new growth.
Lumen reiterated its 2022 forecast, which included free cash flow, which alarmed investors as AT&T failed to collect its dividend with free cash flow in 2Q-22.
That said, Lumen Technologies is paying a very attractive stock market yield of 9.4%, which is still covered by free cash flow, and the next cash infusion catalyst could see the company pay down even more debt by now. the end of the year.