- Lumen (LUMN) stock has a very low valuation and a high dividend yield
- It is profitable and can afford to keep paying its current dividend
- The company has decent growth opportunities.
Lumen (NYSE:LUMN) stock is trading at a very low valuation and has an extremely high dividend yield, as well as an adequate balance sheet. Moreover, the company appears to have solid, current businesses and decent growth opportunities. Because of these points, I recommend that investors buy LUMN stock.
Lumen provides fiber optic infrastructure and “edge-computing infrastructure” to small, medium, and large businesses.
Low Valuation and High Dividend Yield
LUMN stock is trading for just eight times analysts’ average 2022 earnings per share estimate for the company and 10 times their mean 2023 earnings per share (EPS) estimate. Meanwhile, the stock’s forward dividend yield is 8.7%.
And importantly, Lumen should not have great difficulty paying its $1 per year dividend. According to Seeking Alpha, columnist Valkyrie Trading Society, Lumen’s free cash flow looks poised to come in at $1.6 billion to $1.8 billion, while the $1 per share dividend costs about $1 billion. One doesn’t have to be an Excel pro or a math genius to figure out that. Based on those numbers, Lumen should not have to reduce its dividend going forward.
Finally, on the company’s balance sheet, its current ratio of 1.57 indicates that it won’t have trouble paying its debts anytime soon. And although its debt of $30.5 billion is high, it’s less than four times its 2021 EBITDA, which is not considered elevated. What’s more, a relatively low $3.6 billion of its debt will have to be paid by the end of 2025.
Solid Businesses and Growth Opportunities
Due in large part to the ongoing erosion of demand for fixed line voice services, the company’s enterprise and mass market i.e. consumer and small business revenue did drop 4.8% and 7.3% year-over-year last quarter. However, those top lines only dropped 0.5% and 1.9% versus Q3, and Lumen agreed to sell “over one-third” of its exposure to “mass market fixed-line voice” to Apollo. The company’s EBITDA, excluding certain items, was $2.1 billion, versus $2.19 during the same period a year earlier, and its free cash flow was $776 million, down from $943 million, excluding certain items.
And for 2022, Lumen expects free cash flow of $1.6 billion to $1.8 billion, along with EBITDA, excluding certain items, of $6.5 billion to $6.7 billion.
Going forward, the proliferation of 5G can boost demand for the company’s products, and that phenomenon may already be taking hold, as in America’s Southeast and Midwest the demand for fiber is double that for copper wiring. Additionally, Lumen has developed very low “latency services” using its wedge cloud network. Many businesses need low latency, which refers to ” the time that elapses between a user request and the completion of that request.”
As Cisco (NASDAQ:CSCO) explained, “Many of the applications requiring low latency need it to improve the user experience and support customer satisfaction by helping applications run faster and more smoothly. Such applications can include those hosted in the cloud, online meeting applications, or mission-critical computation applications.”
Lumen’s Quantum Fiber, which offers “fiber-based broadband to small business and residential customers,” is growing 20% per year. Valkyrie Trading believes this business, which Lumen is diligently working on expanding, can be quite profitable for the company. With Quantum Fiber, Lumen is embracing a new strategy of targeting many areas within urban and suburban environments where it can still profitably offer Quantum Fiber, instead of seeking to penetrate only the most profitable locations as it did previously.
The company is also going to use more local-based sales teams in order to boost the penetration of Quantum Fiber.
The Bottom Line
The shares are trading at a very low valuation and offer an extremely high dividend yield, while Lumen can afford to continue paying its dividend and remains profitable.
Many businesses need its low-latency edge-computing infrastructure, and the demand for its Quantum Fiber seem to be strong.
On the date of publication, Larry Ramer 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.