Lumen Technologies Inc. executives say that a time may come when the company has to decide between investing in its network and funding its generous dividend. Analysts believe that time is now.
Lumen recently struck back-to-back deals worth more than $10 billion, first agreeing to sell its Latin American business to alternative investment firm Stonepeak Partners LP for $2.7 billion in late July, and then, several days later, agreeing to divest legacy telecommunications assets to Apollo Global Management Inc. for $7.5 billion. Under that second deal, Apollo will acquire Lumen's incumbent local exchange carrier assets in 20 states, including local fiber and copper networks, broadband-enabled homes and businesses, fiber- and copper-fed buildings, lit towers, and central offices.
Lumen executives say the cash from these deals gives the company the financial capacity and strategic focus to invest in further fiber deployment in its remaining businesses. But analysts note the deals will result in a smaller company that generates less cash flow, challenging Lumen's ability to support its dividend long-term. At least one wonders if Lumen would have been better off cutting its dividend now and using that money to retain the ILEC assets being sold.
"Lumen is handing a big value creation opportunity to Apollo," New Street Research analyst Jonathan Chaplin said in a research note. He estimated that Apollo can create $6 billion in value by upgrading 4 million homes bought from Lumen to fiber.
"They should be doing this themselves. They should have cut the dividend and invested for long term value rather than sell," he said.
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Lumen paid $274.0 million in dividends from cash flows in the second quarter, 1.1% more than it paid in the year-ago quarter. Over the past year, the company has spent almost $1.12 billion of cash flow on dividends.
Lumen's 7.4% dividend yield, or the percentage of its share price that it pays out in dividends each year, remains above that of larger telcos AT&T Inc. and Verizon Communications Inc.
Analysts widely agree that Lumen's current dividend is unsustainable if the company wants to invest in its networks and deploy greater fiber.
"Lumen really has to do something because clearly what they are doing right now isn't working," CFRA analyst Keith Snyder said, noting that Lumen's revenue is declining on a year-over-year basis.
"If anything, [the Apollo deal] may be baby steps. I wouldn't be surprised if we see a few more asset sales and they cut the dividend," Snyder said.
Between Lumen's smaller cash flow base due to its recent divestitures and the company's plans to accelerate investment in its retained properties, "a dividend cut seems almost inevitable," MoffettNathanson analyst Nick Del Deo said in a research note, adding that Lumen's dividend is "the reason many investors own the stock."
Following the Stonepeak and Apollo deals, Lumen will retain ownership of its ILEC assets in 16 states, as well as its national fiber routes and competitive local exchange carrier networks in all 36 states.
"Our retained markets have significantly higher fiber penetration, population density, enterprise demand and overall growth opportunity than the transferred assets," Lumen President and CEO Jeffrey Storey said in a conference call after the deal. While the ILEC assets being sold include only 200,000 fiber-enabled locations, the retained ILEC assets count 2.4 million.
Storey said approximately 70% of Lumen's remaining mass-market footprint after the deals will be "the sort of urban and suburban markets that are best addressable" with fiber-to-the-home solutions. The company is developing an accelerated build plan but has yet to finalize details.
The CEO acknowledged a hard decision may be on the horizon with regards to the company's dividend.
"The profile of our business is changing and will change rapidly going forward as we lean into investing for growth and continuing to rationalize the portfolio. I do realize that will put pressure on our dividend ... but as of now, we are not faced with that trade-off decision," he said.
