Lumen Technologies (NYSE: LUMN) - American telecom company. Until recently called CenturyLink. The company is in a state of transformation and at the same time paying huge dividends, but her debts and 5G risk ruining everything.
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What do they earn
The company's business largely revolves around fiber optic internet and related services.. According to the company's annual report, its revenue by type of goods and services is divided as follows:
- IP and data - 30,76%. Everything related to network operation and content broadcasting.
- Infrastructure - 24,08%. Setting up Internet communications, as well as advising and managing them.
- Voice communication - 17,48%.
- IT and management services - 2,31%. IT Application Management Solutions, cloud computing and others.
- Broadband Internet for households — 14,04%.
- Voice communication for the consumer segment - 7,83%.
- Participation in state programs for connecting remote households to the Internet — 2,96%.
- TV maintenance services for the consumer segment — 0,54%.
By type of customer, revenue is divided into the following segments.
International and global clients — 16%. Goods and services for about 200 companies, leading operations around the world. Segment Adjusted EBITDA margin - 65,43% from its proceeds. By type of goods and services, segment revenue is divided as follows::
- IP and data - 45,69%.
- Infrastructure - 37,15%.
- Voice communication - 10,8%.
- IT and management services - 6,36%.
Services for businesses, as well as government departments and agencies — 29%. Segment Adjusted EBITDA margin - 58,26% from its proceeds. By type of goods and services, segment revenue is divided as follows::
- IP and data - 45,23%.
- Infrastructure - 28,1%.
- Voice communication - 24.88%.
- IT and management services - 1,79%.
Small and medium businesses — 12%. Segment Adjusted EBITDA margin - 69,18% from its proceeds. By type of goods and services, segment revenue is divided as follows::
- IP and data - 41,53%.
- Infrastructure - 13,76%.
- Voice communication - 42,94%.
- IT and management services - 1,77%.
Wholesale segment — 18%. Here Lumen serves telecom companies. Segment Adjusted EBITDA margin - 85,27% from its proceeds. By type of goods and services, segment revenue is divided as follows::
- IP and data - 33,88%.
- Infrastructure - 46,7%.
- Voice communication - 19,35%.
- IT and management services - 0,07%.
Consumer segment — 25%. These are services for individuals, as well as non-core income: rent and sublease, participation in state programs for the development of online communications in remote regions and others. Segment Adjusted EBITDA margin - 87,83% from its proceeds. By type of goods and services, segment revenue is divided as follows::
- Broadband Internet for households — 55,39%.
- Voice communication for the consumer segment - 30,88%.
- Participation in state programs for connecting remote households to the Internet — 11,71%.
- Other - 2,02%.
More 90% the company's revenue is made in the USA, less 10% revenue - in unnamed other countries. The company has been profitable for the last three quarters.
Arguments in favor of the company
Quantum ducks. The company faced stagnation of the core business. To steer the situation, Lumen is restructuring: in 2022, the Latin American business and part of the divisions in the segments "services for enterprises" and "wholesale segment" will be sold. The company is also actively developing the direction of "quantum fiber-optic Internet", in which the word "quantum" is purely for beauty. I think, the latter fact may make the quotes attractive in the eyes of retail investors, which will lead to the word "quantum".
This business segment in the medium term can really move the company's financial results forward.. Not in the near future - probably, the first serious results will become noticeable in two years. But for most retail investors, it doesn't matter.: I think, they can pump up the quotes of the company right now. Moreover,, judging by the analysis of search queries in the US, they are hyperactive again.
And if you look beyond the speculative pumping of shares, then this high-speed Internet connection can be claimed by the growing segment of cloud computing. In this regard, the company's management rightly counts on its growth and benefit in the future..
Inexpensive. If we project the results of the last three quarters into the future, then it will turn out, that the company's profit is approximately $ 2 billion a year. In this case, her P / E will be in the area 9. That's not a lot, especially against the backdrop of competitive Cisco c P / E above 20. P / S at Lumen in the area 0,75, while Cisco has 4,64. This is another argument in favor of, that the company's shares will be pumped by investors, because they are cheap.
Diversification. According to the annual report, none of the company's clients give her more 10% proceeds. It's good, because if one of the clients leaves, the reporting will not deteriorate much.
Dividends. The company pays 1 $ per share per year, what about the current share price 13,61 $ gives already 7,21%. By today's standards, this is just a gigantic profitability.. So that, I think, fans of payouts can run into promotions, what, yet again, will allow you to pump up quotes.
Investor Expected Dividend Yield
| Generally | Excluding commodity companies | |
|---|---|---|
| RF | 6,9% | 4,3% |
| United Kingdom | 4,3% | 3,7% |
| Australia | 4,1% | 3,6% |
| Eurozone | 2,9% | 2,8% |
| Japan | 2,4% | 2,4% |
| USA | 1,4% | 1,3% |
| Developing countries (MSCI index) | 2,9% | 2,6% |
| The whole world | 1,9% | 1,8% |
Can buy. Lumen is second only to the two big players in fiber optic cable length among U.S. companies: AT&T и Verizon. Considering this, as well as the advantages mentioned above and the relative cheapness of Lumen, with a capitalization of about $ 14.19 billion, it may well be bought by one of the telecommunications giants.
Activate it. At the moment, activist investors from the Southeastern Asset Management fund are actively campaigning against Lumen management., who own 6,4% companies. The fund requires investing in the development of high-margin projects, sell low-margin and in general for all the good against all the bad. I guess, that the fund will help speed up these processes, and the very fact of such pressure can have a positive impact on quotes.
Also I think, that Southeastern will promote the idea of selling the company, - this will also have a positive effect on quotes. May be, even they will come up with the idea to spin off "quantum fiber" into a separate company, whose quotes will grow significantly better, than Lumen's core business.
What can get in the way
Dividends. The company spends about half of its annual profit on dividends.. Basically, ratio is normal. But the company simply has a huge amount of debt - $ 47.12 billion, of which during the year it is necessary to close 8.3 billion. She doesn't have much money at her disposal., so you have to look for money to close the debts. Lumen also needs to invest in its own development - "quantum fiber" requires a lot of investment. And there is still a rise in interest rates and an increase in the cost of loans.. It seems to me, the risks of cutting dividends are big here - and stocks can fall sharply from such cuts.
5G and its perception. The development of 5G infrastructure in the US and the world may lead to, that consumers will move away from fiber to 5G. Basically, the company hedges these risks by switching to serving the cloud computing segment, where fiber will remain in demand for a long time.
But I wouldn't expect it, that Lumen's financial performance will grow. Quicker, vice versa: Lumen is in a state of controlled decline and transformation. “Lumen of the future” with cloud computing as an engine of revenue growth and a guarantor of financial stability looks more interesting, than "Lumen of the present" with a bunch of different segments, which show mixed results.
Resume
Lumen is an interesting dividend story, in which you can invest with the expectation that, that activist investors will continue to put pressure on the management of the company for the common benefit of all shareholders. But huge debt creates risks of canceling dividends. And the restructuring and rebirth of the company will take at least another couple of years.. So before investing in a company, consider all the risks.
