There’s one main reason why people buy stock in Lumen Technologies (NYSE:LUMN). That’s for LUMN stock’s juicy 8.8% dividend yield. In a world where interest rates have been low seemingly forever, a nearly 9% dividend seems like a gift. However, Lumen may end up being more of a nightmare for income-seeking investors, at least ones that can’t afford any potential dividend cuts.
Lumen operates a telecom business with a focus on consumer broadband, voice and enterprise services. However, much of these are legacy operations are in natural decline as people upgrade to newer and better telephony options. As a result, Lumen is a company that has been in consistent decline from an operations basis.
The company’s revenues peaked in 2018 at $22.6 billion. They’ve fallen to $21.4 billion in 2019, $20.7 billion in 2020, and just $19.7 billion in 2021. The company’s voice business is shrinking the most quickly, as traditional phone service just isn’t an attractive market nowadays. Voice shrunk 15% for Lumen in 2021 alone. However, more worryingly, its consumer broadband business also declined 3% in 2021 — broadband is still a competitive technology so you’d at least hope to see flat results there. And, incredibly, on the enterprise side of things, all four Lumen categories declined in 2021. Compute and application, fiber and IP and data services were all down 2-3% in 2021. Meanwhile enterprise voice was down by double-digits. Lumen has a lot of businesses but virtually all of them are shrinking at the moment.
This makes Lumen a dangerous holding as a dividend play. For the company to keep paying out its oversized dividend, it needs stable operating results from the business. Instead, as earnings are pressured, the company may struggle to keep paying out its current 25 cent per quarter dividend. We’ve already seen this play out once before. Between 2013 and 2018, Lumen paid a quarterly dividend of 54 cents per share. In 2019, it slashed this by more than half to the current 25 cents per quarter payment. Now, even that figure is looking less and less secure.
Analysts see the company earning $1.33 per share in 2022. That’s more than enough to cover the $1.00 of annual dividends that it will pay out if it wants to maintain the current quarterly rate. So far, so good. In 2023, however, analysts see Lumen’s earnings dropping to 98 cents. That’s right on the border line of being too low to support a $1.00 dividend. In 2024, analysts see Lumen’s earnings falling to 90 cents, which is well short of meeting the current dividend level. And this assumes that Lumen is willing to spend 100% of its earnings on paying its dividend.
With interest rates surging, perhaps Lumen will want to address its considerable debt load instead, before it becomes too expensive to manage. And Lumen will probably also want to invest more capital in next-generation telephony services to try to reverse the decline in its operating results. All that leads to a real chance of a dividend cut. It might not be in 2022, but sooner or later, if Lumen can’t get its earnings trending upward again, the dividend is likely to end up on the chopping block.
On the date of publication, Ian Bezek did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.