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Lumen Technologies Inc(LUMN-N)

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This Stock Was One of the S&P 500's Worst Performers in 2023: Is It Time to Buy the Dip or Let It Go?

Motley Fool - Fri Jan 5, 8:08AM CST

In 2023, you could have done worse than investing in Lumen Technologies(NYSE: LUMN) stock -- but not much worse. The company was a notable laggard on the heavy-hitter lineup that is the large-cap S&P 500 index, plummeting by nearly 65% over the course of the year. Meanwhile, the index it's a part of zoomed more than 24% higher. The S&P 500 stocks did well, then, despite being burdened by Lumen.

Following that long-tail rout, Lumen has kicked off 2024 by trading well under $2 per share. Perhaps that makes it quite the bargain for discount-minded investors. Let's explore.

Doubling down on legacy operations

Lumen is a company in the middle of a long transition. Years ago, when it was known as CenturyLink, it devised a somewhat counterintuitive strategy to concentrate on legacy landline telecom operations. That was in sharp contrast to industry incumbents AT&T(NYSE: T) and Verizon(NYSE: VZ), which pushed hard into mobile telephony.

We can see which approach is winning the day. Verizon is consistently profitable and has generally managed to grow its top line despite already-considerable size and scale (AT&T, which hived off its entertainment assets in 2022, is a more complicated story). Lumen, by contrast, has suffered several annual revenue declines in a row and has booked headline net losses in four of the trailing five years.

Under its newish CEO, former Microsoft U.S. president Kate Johnson, the company is attempting a turnaround. Sensibly enough, it's trying to pivot to more high-demand telecom segments while shaving costs.

However, there are challenges to this approach. Yes, the company can offer very speedy broadband internet access thanks to its extensive fiber network. However, other high-bandwidth options abound in the U.S. market. The company's ambition to be an important provider for businesses makes it one of numerous service providers jockeying for position.

Telecom is not an industry for the faint-hearted

What makes this situation particularly challenging is that the telecom industry is a serious capital consumer. It's ferociously expensive to build out and maintain capacity in this business. To be a competitor, Lumen took on a heavy debt load. Although that has lightened somewhat, it still stood at more than $19.7 billion as of the end of its most recently reported quarter.

To put those borrowings in perspective and compare them to peers, Lumen's debt-to-equity ratio -- an important balance sheet yardstick for stocks -- is just short of 9 at the moment. Those for both Verizon and AT&T, companies that have never been shy to go the debt route for financing, are well under 2.

Last October, Lumen got a bit of a break with creditors holding over $7 billion of its debt. These lenders agreed to extend the maturities of the securities at the heart of those borrowings out to 2029 and 2030. Additionally, those obviously flexible businesses agreed to provide $1.2 billion worth of new financing.

That's encouraging, but it only gives Lumen more time to retire the debt; that credit doesn't just melt away. Also, with interest rates currently being high relative to recent historical levels, interest payments on borrowings -- especially that new $1.2 billion -- aren't going to be cheap.

There are more generous and strategically sound competitors

When a company is struggling with its finances, one lever it can pull is a dividend cut or suspension. Lumen elected to do this in late 2022, and there's no sign of the payout coming back. To put it mildly, investors weren't pleased, as the company had been considered something of an income stock.

Uncomfortably for Lumen, other telecom biggies are happy to pay a dividend and do so generously. At the moment, Verizon hands out a quarterly distribution of nearly $0.67, which yields quite a meaty 6.8% at the current share price. Not to be outdone, AT&T dispenses a bit under $0.28 every quarter for a competitive yield of 6.5%.

So those two incumbents are clearly in better fundamental shape than Lumen. The question is, can the latter's turnaround lift the company to success?

I have some serious doubts. The telecom game is a tough one to play and an easy one in which to fall well behind. In the best case, Lumen's recovery (assuming it happens at all) will take years. I don't see a compelling reason to invest in a business that's such a long shot, particularly when there are solid income stocks in the same sector for the taking. I wouldn't place a bet on Lumen.

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Eric Volkman has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Microsoft. The Motley Fool recommends Verizon Communications. The Motley Fool has a disclosure policy.

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