Lumen Suspends Dividend to Prioritize Debt Reduction, Growth Investments
Lumen suspended its dividend after the market closed Wednesday as part of the telecom provider's third quarter earnings report.
As we discussed back in February, the firm's capital-intensive plan to expand its fiber internet business created risk for the dividend by reducing free cash flow coverage and putting more pressure on Lumen's BB- rated balance sheet.
Cost inflation and continued revenue declines in Lumen's legacy businesses added to the company's challenges.
Lumen had a Very Unsafe Dividend Safety Score for years, reflecting these risks and management's poor capital allocation track record.
We would be surprised if Lumen reinstated its dividend within the next year with fiber investments ramping and debt reduction taking higher priority in a rising rate environment.
Eliminating the dividend saves Lumen $1 billion annually, a sizable sum compared to the $3 billion-plus of capital investments the firm intends to make in 2023 alone.
Whenever the dividend does return, reinstating the payout at a lower level would provide Lumen with more flexibility to manage its junk-rated balance sheet.
A 50% haircut could result in a free cash flow payout ratio around 20% to 30%. The stock would have a dividend yield near 8% if the dividend was eventually reset at this level, based on Lumen's after-hours stock price which has dropped 12%.
The company's evolving sales mix and transition to a new CEO may increase the stock's appeal as a long-term turnaround play. But conservative investors are better off owning businesses with stronger balance sheets, healthier growth, and more durable competitive advantages.
Within the telecom space, Verizon and AT&T may be worth considering as an alternative.
As we discussed back in February, the firm's capital-intensive plan to expand its fiber internet business created risk for the dividend by reducing free cash flow coverage and putting more pressure on Lumen's BB- rated balance sheet.
Cost inflation and continued revenue declines in Lumen's legacy businesses added to the company's challenges.
Lumen had a Very Unsafe Dividend Safety Score for years, reflecting these risks and management's poor capital allocation track record.
We would be surprised if Lumen reinstated its dividend within the next year with fiber investments ramping and debt reduction taking higher priority in a rising rate environment.
Eliminating the dividend saves Lumen $1 billion annually, a sizable sum compared to the $3 billion-plus of capital investments the firm intends to make in 2023 alone.
Whenever the dividend does return, reinstating the payout at a lower level would provide Lumen with more flexibility to manage its junk-rated balance sheet.
A 50% haircut could result in a free cash flow payout ratio around 20% to 30%. The stock would have a dividend yield near 8% if the dividend was eventually reset at this level, based on Lumen's after-hours stock price which has dropped 12%.
The company's evolving sales mix and transition to a new CEO may increase the stock's appeal as a long-term turnaround play. But conservative investors are better off owning businesses with stronger balance sheets, healthier growth, and more durable competitive advantages.
Within the telecom space, Verizon and AT&T may be worth considering as an alternative.
