This popular dividend stock just jumped 13% after earnings
In recent years, Light technologies (NYSE: LUMN) – formerly known as CenturyLink – has historically been one of the top-grossing stocks on the S&P 500. This has made it extremely popular with income investors.
The telecommunications giant, however, has been a bad dividend-paying stock for the past 10 years. On the one hand, the company cut its payouts by over 50% at the start of 2019. In addition, its stock price has fallen by over 60% over the past decade, giving it a total return of – 15% over this period.
Long-suffering Lumen shareholders, however, had reason to celebrate this week. On Wednesday afternoon, the company reported strong profit growth for the third quarter. It also gave investors more clarity on its aggressive investment and capital allocation plans. That pushed the dividend stock up 13% on Thursday.
Another beat of gains
Lumen has repeatedly beaten analysts’ earnings estimates in recent quarters. However, the Lumen stock did not benefit much, as the company’s revenue steadily declined.
The third quarter earnings report followed this typical pattern. Revenue fell 5.4% year-on-year to $ 4.89 billion, roughly in line with analyst consensus. Lumen, however, offset some of this drop in revenue with cost reductions. Excluding special items, adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) fell only 2.5% to $ 2.08 billion.
Additionally, Lumen’s adjusted earnings per share (EPS) climbed 40% to $ 0.49, crushing the average analyst estimate of $ 0.38. To be fair, lower depreciation and amortization charges associated with two pending asset sales likely explain most of this variance. Nonetheless, the scale of the gains beaten was impressive.
The management takes a combative tone
Three months ago, Lumen announced a pair of massive asset sales. The company plans to sell its Latin American assets to Stonepeak for $ 2.7 billion and its traditional telecommunications operations in 20 US states to subsidiaries of Apollo Global for $ 7.5 billion. Together, these assets generate approximately 20% of Lumen’s Adjusted EBITDA, so selling them will reduce its earnings and free cash flow.
Adding to the pressure on free cash flow, these sales will use up the remainder of Lumen’s deferred tax assets, resulting in a higher cash tax burden going forward. Meanwhile, Lumen plans to accelerate the expansion of its fiber-to-the-home broadband initiative, which will lead to increased capital spending.
Due to the triple whammy, management hinted in August that Lumen may have to cut its dividend again next year. However, on Wednesday they changed their tone, saying that even though Lumen’s payout ratio will increase in the near term, the company plans to continue paying a quarterly dividend of $ 0.25 per share.
In an equally bold move, Lumen completed the entire $ 1 billion share buyback program announced in August in early October. It repurchased nearly 81 million shares, reducing its number of shares by more than 7%. CEO Jeff Storey also hinted at the potential for additional buyback programs going forward.
A risky financial strategy
The announcement that Lumen plans to hold on to its dividend likely contributed most of the stock’s 13% gain on Thursday. The aggressive buyout probably appealed to some shareholders as well, as it shows management’s confidence in the company.
That said, some analysts were skeptical of these moves to return more money to shareholders rather than continuing to focus on debt reduction. In particular, Bank of America analyst Merrill Lynch, David Barden, noted that focusing on dividends and buyouts rather than debt management has had dire consequences for other heavily indebted companies and incomes. persistently declining. Indeed, the new management capital allocation plan definitely makes this stock of dividends even more risky than it was previously.
Will the fiber investment plan succeed?
Ultimately, the success of Lumen’s plan to significantly expand its consumer fiber business will likely determine whether management’s decision to maintain the dividend and buy back shares will pay off. Today, Lumen has approximately 2.7 million homes equipped with fiber (almost all of which are in states that are not sold to Apollo). Recently, it has expanded its fiber footprint by approximately 400,000 households per year.
This extension seems to be bearing fruit. In the first nine months of 2021, Lumen increased its fiber optic subscriber base by 15% (from 675,000 to 774,000), while average revenue per user rose from $ 56 per month to $ 59 per month.
By the end of 2022, Lumen plans to start increasing the number of homes with fiber optics at a rate of 1.5 million to 2 million units per year. This would allow it to reach its addressable opportunity of over 12 million homes within about six years. At Lumen’s assumed 40% penetration rate, the company would have perhaps 5 million fiber-optic broadband customers, adding billions of dollars to its revenue.
This plan is certainly plausible. And if successful, it should generate solid revenue and EBITDA growth for Lumen. This would allow him to easily bear his debt – and it would likely drive up the stock of dividends. But if Lumen doesn’t realize the market share gains it expects, the company’s risky capital allocation strategy could lead to a crisis within a few years.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Questioning an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.