Lumen Technologies Inc. (NYSE:LUMN) was my most recent investment, which returned 11.2%. At a weighted-average purchase price of $8.95 per share, I have locked in a constant, sustainable, and covered 11.2% dividend yield and think that the valuation has fallen unjustifiable. Lumen Technologies is on my truck because inflationary worries have lately destroyed the company’s capitalization. Despite the current market slump, Lumen Technologies is extremely likely to keep its annual dividend of $1.00 per share.
At its present pricing, Lumen Technologies has a very large margin of safety.
What Happened?
The Dow Jones Industrial Average fell over 1,300 points on Tuesday following the announcement of August inflation statistics. The annual inflation rate in August was 8.3%, prompting investors to fear since they expected the central bank to continue rapidly raising interest rates in 2022. With further substantial rate cuts on the coming, widely regarded as negative for the market, valuations have fallen through the floor, giving a purchasing opportunity for investors with capital to deploy.
As a result of this selloff, Lumen Technologies’ stock has dropped close, and then beyond, the $9 mark. Lumen Technologies’ free cash flow has consequently begun to trade at a large discount, and I recommend taking advantage of the valuation fall. Lumen Technologies stands out not only for its 11.2% dividend yield but also for its strong free cash flow. As I proved last time, Lumen Technologies easily covers its dividend with free cash flow, but the present pricing is so ridiculous that I couldn’t help but load up the truck.
Lumen Technologies Has A Ridiculous Free Cash Flow Multiple
Lumen Technologies’ 11.2% yield is not the only incentive to buy the company. Another indicator is a low free cash flow payout ratio. The annual dividend payment of around $1.0 billion by Lumen Technologies is projected to be readily funded by free cash flow. In 2022, the company expects to produce $2.0-2.2 billion in free cash flow, resulting in a free cash flow payout ratio of 45-50%.
This payout ratio suggests that Lumen Technologies’ 11.2% yield is not as unusual or unstable as it looks, but rather that the market has grown unduly pessimistic in its free cash flow valuation. The telecoms business has reiterated its financial forecast for 2022, which includes a $2.0-2.2 billion free cash flow potential. Lumen Technologies’ stock is valued at 4.5 times free cash flow, with a free cash flow expectation of $2.0-2.2 billion in 2022, a valuation that I believe will not continue long.
Catalyst: $7 Billion Cash Infusion
Lumen Technologies has sold historic assets in the United States and Latin America, and the company expects to get $7 billion in cash when regulators approve the transactions. The $7 billion cash infusion will allow Lumen Technologies to repair its balance sheet and retain its dividend. Lumen Technologies aims to utilize some of the proceeds to settle some of its long-term debt, which stood at $28.0 billion as of June 30, 2022. With a $9 billion equity market value, Lumen Technologies has to do more to minimize its debt.
Why Lumen Technologies’ Stock Could Drop
Lumen Technologies’ traditional telecom business is facing growth issues, but the company has an opportunity to develop its quantum fiber operations, generating considerable client demand. Having said that, Lumen Technologies’ telecom assets continue to generate considerable free cash flow, more than enough to fund the dividend. Lumen Technologies’ value may decline if its free cash flow lowers.
Final Thoughts
Buy the drop, buy the drop, buy the drop. Lumen Technologies’ stock is extremely tempting, with a free cash flow multiple of 4.5x and an amazing margin of safety for (income) investors. Lumen Technologies has outstanding free cash flow, as does its 11.2% dividend yield, which is fully supported by free cash flow. Lumen Technologies will also get a cash payment of around $7 billion from asset sales in the year’s second half, providing the business with a trigger for a higher valuation and funding to repay at least some of its mounting debt.
To summarize, I believe Lumen Technologies’ free cash flow has become too cheap, and investors should act quickly before the market corrects its mistake.
Featured Image – Megapixl © Transversospinales
