Following management’s issuance of a weaker-than-anticipated forecast, Verizon (NYSE:VZ) recently saw a significant sell-off.
That sell-off prompted other telecommunications firms like Lumen Technologies (NYSE:LUMN) to decline as well on predictions of similarly subpar guidance.
There are two distinct reasons, however, why investors should disregard Verizon and purchase Lumen instead.
First, About Verizon’s Q2 Results
The company lowered numerous areas of guidance. For example, the midpoint of the 2022 service and other revenue growth forecast was changed from flat to slightly lower.
At the midpoint of the projection, the growth rate of total wireless service revenue was cut by 0.5 percent.
Originally predicted to increase by 2 to 3 percent this year, adjusted EBITDA is now predicted to decrease by 0.75 percent at the midpoint of forecast.
Finally, adjusted profits per share were down a staggering 5.5 percent at the midpoint.
So Why is Lumen a Better Bet?
Lumen Technologies (NYSE:LUMN) has a considerably greater margin of safety than Verizon (NYSE:VZ) does, even though it has also established itself as a serial underperformer.
Despite the recent strong sell-off, Verizon continues to trade above its five- and ten-year average EV/EBITDA multiple, whereas Lumen is markedly below its own.
This suggests that Verizon (NYSE:VZ) is priced to perform at or above prior expectations, but Lumen Technologies (NYSE:LUMN) is priced to perform at or above prior expectations. In other words, Lumen can underperform by a significant amount and still produce good long-term returns.
Additionally, Lumen currently offers shareholders a fairly attractive dividend yield of 9.5 percent, compared to Verizon’s yield of 5.8 percent.
While it is true that Lumen Technologies’ (NYSE:LUMN) yield is not as secure as Verizon’s (NYSE:VZ), it is also true that Verizon must generate some growth in addition to its dividend payout in order to provide strong shareholder returns, whereas Lumen’s large dividend means that there is less pressure on it to generate growth to drive shareholder returns.
What Else is Happening at Lumen?
Lumen Technologies (NYSE:LUMN) is equally focused on selling off non-core assets, even if management is undoubtedly spending heavily to get the top line back to growing through its quantum fiber business and a few other divisions (or possibly even the entire company).
Also, management clearly suggested during its most recent results call that such transactions (selling non-essential assets) would be forthcoming. For example, Lumen CEO Jeffrey Storey said on the recent earnings call:
“I will emphasize that we implemented a policy of being receptive to smart asset optimization. We’ve also shown that we have the discipline to complete deals correctly rather than simply completing deals. Therefore, we’ll keep doing it. While there is no pressing need for us to divest anything, we are constantly looking for the most effective ways to deliver substantial returns to our shareholders.
I’ll also add that all purchases or sales must, in my opinion, satisfy two basic requirements: favorable valuation and strategic value to Lumen. We must thus adhere to these two principles in all we undertake. You should note that both of our sales—to Apollo for our ILEC business in 20 states and to LatAm—met the criteria for acceptable valuations and benefited Lumen strategically. Therefore, that will be the setting in which we will consider any kind of acquisition or disposition.”
These sales could have a significant impact on its cash flow statement. It could sell its markets in Wyoming, Montana, Iowa, and North Dakota for $500 million in proceeds, or perhaps even more if the assets in Iowa and North Dakota are included, assuming the two rumored probable deals go through.
Meanwhile, the sale of the company’s whole European network might bring in up to $2 billion. These sales might account for 23 percent of the current market capitalization and 6.5 percent of the entire enterprise value.
All of this is why Lumen Technologies (NYSE:LUMN) could be an attractive investment going forward.
Featured Image: Megapixl @RightFramePhotoVideo
