Today's Telecoms are much different than those of the past, when the industry was much simpler. Traditional telecoms have had to diversify their offerings into other sub-industries and technologies in order to survive.
Formerly known as CenturyLink, a legacy telecom, Lumen Technologies (NYSE:LUMN) is a good example of this. It has been transitioning into data services over the past few years, in order to battle landline attrition. Management has invested in fiber cable assets, as a part of this transition, and has entered the data center business.
LUMN provides various communications services to residential, business, wholesale, and governmental customers in the US and internationally. It offers IP and data services, including VPN data network, Ethernet, internet protocol, and content delivery services. The company also offers transport and infrastructure services comprising high bandwidth optical networks; unlit optical fiber networks, and related professional and management services; private line services, a direct circuit or channel specifically dedicated for connecting two or more organizational sites; colocation and data center services.
On July 25, 2021, affiliates of Level 3 Parent, LLC, an indirect wholly-owned subsidiary of Lumen, agreed to divest their Latin American business in exchange for $2.7B cash. On August 3, 2021, Lumen and certain of its subsidiaries agreed to divest a substantial portion of their incumbent local exchange business in exchange for $7.5B. Both deals are expected to close in 2022.
Debt:
LUMN also has a large debt load, which management has been paying down over the past 2.5 years. Management cut the quarterly dividend in Q1 '19, from $.54 to $.25, in order to devote more cash flow to paying down debt.
The debt load stood at $35B-plus in 2018, and they've continue to whittle it down since then. It was 17% lower by the end of 2020, and has fallen another 6.7% in 2021. It stood at $27.43B, as of 12/31/21.
Falling debt and lower rates have also put a nice dent in LUMN's Interest expense, which fell 6% in Q4 '21, 8% in 2021 vs. 2020, and 17.5% in 2020.
As of 12/31/21, LUMN had ~5% of its debt maturing in 2022, 3.3% in 2023, and ~4% in 2024. Its credit revolver matures in 2025, and had $2B in availability, as of 12/31/21. LUMN also had $354M in cash at the end of Q4 '21.
Earnings:
LUMN recently announced $1.2B network services contract win for the U.S. Department of Agriculture. As part of this solution, it'll deliver secure remote access, managed data, contact center and cloud connectivity solutions to more than 10,000 USDA locations across the country and abroad.
Overall, LUMN's Q4 '21 Enterprise sales channel was ~flat vs. Q3 '21, but down 4.8% vs. Q4 '20.
Sales within North America Enterprise, which do not include the public sector, were up both sequentially and year-over-year. December was the highest sales month LUMN has had in this area in several years.
Business revenue declined 0.4% sequentially in Q4 '2, and 4.7% to $3.494 billion on a year-over-year basis. iGAM revenue declined 0.2% sequentially and 1.5% on a year-over-year basis.
LUMN sold the remainder of its correctional facilities communication services business in Q4 '21. The sale of this business impacted Large Enterprise revenue by about $7 million in the fourth quarter. Normalizing for this sale, Large Enterprise declined 0.3% vs. Q3 '21 and declined 5.9% vs. Q4 '20.
Mid-Market Enterprise revenue was ~flat in Q4 '21, but had the largest decline, 7.1%, vs. Q4 '21.
Wholesale revenue was ~flat vs. Q3 '21 and declined 4.3% vs. Q4 '21, an improvement over the 7% year-over-year decline in Q3 '21.
Mass Markets fiber broadband revenue grew 22% year-over-year in Q4 '21. LUMN added 29,000 Quantum Fiber customers during Q4 '21, up from 25,000 in Q4 '20. Overall, however, Mass Market revenue 21 revenue declined 1.9% sequentially, 7.3% vs. Q4 '20.
IP and Data Services is the biggest Enterprise product category, with 48% of Q4 '21 revenue. It was down 3-2% vs. Q4 '2o, and roughly flat vs. Q3 '21. Compute & Application Services was a bright spot, rising 3.9% vs. Q3 '21, but still down 2.2% vs. Q4 '20.
The Voice & Other legacy category continues to be a drag on earnings, it was down 15% year-over-year in Q4 '21, but down 3.2% vs. Q3 '21, the same sequential decline as in Q2 '21. Consumer Broadband fell 3.4% vs. Q4 '20, with 1.3% decline vs. Q3 '21.
Q4 '21 Revenue declined 5.4% on a year-over-year basis to $4.847 billion. Year-over-year metrics continued to be impacted by COVID-related demand in 2020. On a sequential basis, total revenue declined 0.8%, in line with the sequential rate of decline in the third quarter.
Adjusted EBITDA was down less than -1% in Q4 '21 and for full year 2021, while Net Income reversed in a big way in both Q4 '21 and for the full year, due to impairments in 2020.
While Free Cash Flow was off by -18% in Q4 '21, it was up ~29% for full year 2021. Adjusted EPS rose 21% in Q4 '21, and 66% in 2021, with the share count reduced by 6% via LUMN's buyback program.
Adjusted EBITDA margin hit 43.1% in Q1 and Q4 '21, and ended the year up by 110 basis points, at 42.9%, vs. 41.8% in 2020:
Dividends:
At LUMN returned $2.1B to shareholders during 2021 through quarterly dividend payments and its stock repurchase program.
At $10.77, LUMN has a dividend yield of 9.29%, one of the higher yields we've covered in our articles.
LUMN should go ex-dividend next on ~3/4/22. Management intends to maintain the $.25 quarterly dividend in 2022 - (see guidance chart further on).
Management commented on LUMN's dividend coverage on the Q4 '21 call this week:
Our payout ratio will likely rise in the near-term during the accelerated Quantum build phase, which we think should be viewed as a discrete project. The completion of the multiyear build phase, coupled with our expectation for topline growth, should return us to more normalized payout ratios over time.
(See the Guidance section further on for our estimated 2022 Dividend Payout ratio.)
Valuations:
With its big ~14% price decline post-earnings, LUMN's valuations have become even cheaper than its largest peers'. It has the lowest valuations for all of these metrics, and is selling at lower than book, with a .92X P/Book.
Its trailing P/E of 5.64X and EV/EBITDA of 4.92X look very low. Even using its 2022 mid-point EBITDA of $6.6B = an EV/EBITDA of 6.28X. Meanwhile, its 9.29% dividend yield is by far the highest in the group.
Profitability & Leverage
We will continue to manage our balance sheet to remain relatively leverage neutral through our Quantum Fiber deployment plan, but we do expect the time line to reach our target net leverage ratio of 2.75 times to 3.25 times adjusted EBITDA will be extended. (Q4 '21 call)
Management returned LUMN to positive ROA and ROE in Q4 '21, hitting numbers that were higher than broad Telecom industry averages. Interest coverage also improved to 5.5X, vs. the pre-pandemic mark of 5.09X, while both Debt/Equity and Net Debt/EBITDA improved as well.
Compared to its peers, LUMN's ROA and ROE are lower than VZ's and AMX's, but are higher than T, TMUS, and BCE, excepting BCE's ROA. LUMN's Interest coverage is 3rd highest in the group, but its debt leverage is still among the highest.
Performance:
With its post-earnings nosedive on 2/10/22, LUMN has severely underperformed Telecom industry averages, and the S&P 500 over this month, quarter, and in 2021. It has held up better than the Telecom industry over the past year.
Analysts' Price Targets:
At $10.77, LUMN is ~10% below analysts' $12.00 average price target, and ~37% below the $17.00 highest price target.
2022 Guidance:
There are several factors affecting LUMN's lower guidance for 2022:
The CAF II subsidy, (Connect America Fund FCC subsidy), ended in 2021, which will impact year-over-year adjusted EBITDA by about $500 million.
When combined, the two divested assets, (LATAM and CECL), are expected to generate about $1.7 billion of EBITDA with capital spending of about $450 million in 2022. We now expect the transactions to close in early third quarter of this year. For simplicity of guidance, we have assumed (only) first half results are included in our consolidated results. (Q4 call)
With ~$1.35B less in EBITDA coming in for 2022, due to the expired subsidy, and 50% pro-rated divestitures, LUMN's guidance vs its 2021 actuals show large year-over-year declines in Adjusted EBITDA and Free Cash Flow.
2 bright spots are Interest Expense, which is expected to fall by nearly 12% in 2022, and Dividends, which management expects to maintain:
Using the 2021 total dividends paid of $1087M, which may decline a bit, if buybacks continue, and the mid-point of $1.7B for 2022 Free Cash Flow guidance, we calculate that LUMN's 2022 Free Cash Flow payout ratio should be ~64%.
That's much higher than Verizon's trailing ~27% cash flow payout ratio, or T's ~36% trailing ratio, but is it strong enough to offer dividend security to prospective investors at LUMN's much higher yield?
Parting Thoughts:
LUMN's debt metrics are improving, while its divestments will cut into earnings and cash flow in 2022. Still, management is maintaining the $.25 quarterly dividend, while acknowledging that the dividend payout ratio will go higher while it builds out its Quantum Fiber infrastructure.
A key piece to the puzzle is how well they'll be able to replace the divested earnings and cash flow over time. They'll get ~$10B from the 2 divestitures in 2022, which could be used to build out infrastructure further, or for accretive acquisitions, or to further deleverage.
We rate LUMN a speculative BUY, based upon its attractive yield, steady dividend, improving debt metrics, and still reasonable dividend coverage. Yes, there wasn't a lot of great news in the Q4 '21 earnings report, but, turning around a Telecom is a bit like moving the Queen Mary - it's a long process, with many moving parts. As we've seen this week, there will be bumps along the road for LUMN, so don't bet the ranch on it.
All tables by Hidden Dividend Stocks Plus, except where otherwise noted.
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