My most recent Lumen Technologies Inc. (NYSE: LUMN) the investment returned 11.2%.
Lumen Technologies is on my truck because inflation fears have recently decimated the valuation of this free cash flow winner.
Despite the current market downturn, Lumen Technologies is will most likely maintain its annual dividend of $1.00 per share. I’ve locked in a consistent, sustainable, hedged dividend yield of 11.2% at a weighted average purchase price of $8.95 per share and think the valuation has fallen unwarranted.
Lumen Technologies has a very high margin of safety at its current price.
The Dow Jones Industrial Average fell nearly 1,300 points on Tuesday following the release of August inflation data.
The annual inflation rate in August was 8.3%, causing investors to panic as they believed the central bank would continue to aggressively raise interest rates in 2022. With further significant rate cuts underway, which are widely seen as bad for the market, stocks fell through the floor, presenting a buying opportunity for investors with cash to deploy.
Shares of Lumen Technologies fell near the $9 level and then rose above it, following the selloff. Lumen Technologies free cash flow has therefore started to trade at a significant discount, and I advocate capitalizing on the reduction in valuation.
Lumen Technologies not only impresses with a dividend yield of 11.2%, but also with an exceptional free cash flow.
Lumen Technologies easily pays its dividend with free cash flow, as I demonstrated last time, but current prices are so ridiculous that I couldn’t resist loading the truck.
Lumen Technologies has a ridiculous free cash flow multiple
Lumen Technologies’ 11.2% return isn’t the only reason to buy the stock. The other is a low free cash flow payout ratio.
Lumen Technologies’ annual dividend payment of approximately $1.0 billion is expected to be easily covered by free cash flow. The company expects to generate $2.0-2.2 billion in free cash flow in 2022, which will result in a free cash flow payout ratio of 45-50%.
This payout ratio clearly shows that Lumen Technologies’ 11.2% return isn’t as weird or choppy as it sounds, but rather that the market has gotten too gloomy in its free cash flow pricing. .
Lumen Technologies shares are valued at 4.5 times free cash flow, with free cash flow forecasts of $2.0 billion to $2.2 billion for 2022, a valuation that I don’t think won’t last. long time. The telecommunications company recently reaffirmed its financial estimate for 2022, which includes free cash flow potential of $2.0 billion to $2.2 billion.
Catalyst: $7 billion in cash
Lumen Technologies has sold legacy assets in the United States and Latin America, and the company expects to get $7 billion in cash when regulators approve the deals.
Lumen Technologies intends to use a portion of the proceeds to repay a portion of its long-term debt, which totaled $28.0 billion as of June 30, 2022.
Lumen Technologies, with a market value of $9 billion, needs to do more to reduce its debt. Lumen Technologies will be able to repair its balance sheet and maintain its dividend thanks to the financial injection of 7 billion dollars.
Why Lumen Technologies shares could fall
Lumen Technologies’ legacy telecommunications business is experiencing growth challenges, but it has a chance to expand its quantum fiber operations, which are generating significant customer demand.
That said, Lumen Technologies continues to generate strong free cash flow from its telecommunications assets, which is more than enough to cover the dividend. If Lumen Technologies’ free cash flow declines, its valuation could fall.
Buy, buy, buy the drop.
Lumen Technologies’ free cash flow is excellent, as is its dividend yield of 11.2%, which is well supported by free cash flow.
Lumen Technologies stock is incredibly attractive, with a free cash flow multiple of 4.5x, and offers (income) investors a truly extraordinary margin of safety.
Given that Lumen Technologies will also receive a cash payment of approximately $7 billion from asset sales in the second half of the year, the company will have both a trigger for a higher valuation high and funds available to cover at least part of its growing debt.
In summary, I think Lumen Technologies free cash flow has become excessively cheap and investors should act quickly before the market corrects its mistake.