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Better Telecom Stock: Lumen Technologies vs. AT&T

Motley Fool - Wed Jan 17, 7:00AM CST

Lumen Technologies(NYSE: LUMN) and AT&T(NYSE: T) are two of the largest telecom companies in the United States. Lumen, formerly known as CenturyLink, is one of the country's largest wireline service providers. AT&T also operates a smaller wireline business, but it generates most of its revenue from its larger wireless business.

Over the past 12 months, Lumen's stock plunged 73% as AT&T's stock dipped 16%. Neither of these stocks has been a great investment, but let's see why AT&T outperformed Lumen by such a wide margin -- and if it's still the better telecom stock.

A visualization of network connections across the United States.

Image source: Getty Images.

Lumen faces an existential crisis

Unlike AT&T and Verizon Communications, which downsized their wireline businesses to expand their wireless businesses, Lumen doubled down on its wireline business through a series of mergers and acquisitions instead of entering the wireless market.

Lumen expected economies of scale to kick in and enable it to generate slow but stable growth from the aging wireline market. It also tried to squeeze more revenue from its enterprise customers by bundling cloud, security, and collaboration services into its business wireline plans.

Unfortunately, the market's demand for wireline connections has dried up, and it simply faces too much competition in the enterprise software market.

The only bright spot has been its fiber business, but growth of that smaller division couldn't offset all of its other weaknesses. As a result, its revenue dipped 5% in 2021 and fell 11% to $19.7 billion in 2022, and analysts expect another 17% drop in 2023. They also expect further revenue declines in 2024 and 2025.

On the bottom line, Lumen racked up a net loss of $1.5 billion in 2022, compared to its net profit of $2.0 billion in 2021, and analysts expect a loss of $8.3 billion in 2023. All of that red ink forced the company to eliminate its dividend in November 2022.

Analysts expect Lumen to narrow its net loss in 2024 and possibly squeeze out a profit by 2025, but it's still drowning in debt, and ended its latest quarter with a net debt-to-EBITDA (earnings before interest, taxes, depreciation, and amortization) ratio of 6.

It's been trying to stay solvent by pushing back the maturity dates for its debt, taking on more high-interest loans, and taking advantage of a recent tax refund, but all of those moves might merely be delaying an eventual bankruptcy.

AT&T has gradually stabilized its business

Throughout 2021 and 2022, AT&T spun off DirecTV, Time Warner, and many of its smaller media assets to finally conclude its ill-fated attempt to become a media giant. Those moves streamlined its business, raised more cash to reduce its debt, and enabled it to expand its higher-growth 5G and fiber businesses.

That sounds like a fresh start for AT&T, but three challenges have spooked the bulls. First, the company reduced its annual dividend by 46% in early 2022 prior to spinning off Warner Bros. Discovery. AT&T's investors received received 0.241917 shares of WBD for every share of AT&T they held, but the dividend cut was still disappointing.

Second, AT&T cut its original outlook for generating $20 billion in free cash flow (FCF) for 2023 to $16 billion throughout the year as the macro headwinds intensified. On the bright side, it slightly raised that forecast to $16.5 billion in its third-quarter report. Lastly, AT&T and Verizon both faced allegations of ignoring the safety hazards in the lead-sheathed copper cables in their legacy wireline networks -- and it could cost billions to replace those cables.

Those challenges have overshadowed AT&T's robust growth in wireless postpaid subscribers, which increased by 2.9 million in 2022 and 1.2 million in the first nine months of 2023. Its fiber network also gained over 200,000 net adds for 15 consecutive quarters. That stable growth largely offset the weaker growth of its business wireline division.

AT&T's adjusted revenue from continuing operations and adjusted earnings grew 2% and 7%, respectively, in 2022. For 2023, analysts expect its revenue to rise 1% in 2023 as its adjusted EPS dips 5%, but they expect both figures to rise 1% in 2024. As its growth stabilizes, it expects to reduce its net debt-to-EBITDA ratio from 3 at the end of 2023 to 2.5 by the first half of 2025 -- so its balance sheet looks a bit healthier than Lumen's.

The better buy: AT&T

Both of these telecom stocks could remain out of favor in this market, especially as high interest rates continue to drive income investors toward risk-free CDs and T-bills. But over the long term, AT&T should outperform Lumen because its business is healthier, its stock looks cheap at 7 times forward earnings, and it pays a high forward yield of 6.7%.

Meanwhile, Lumen could struggle to survive over the next few years. Its stock is tough to value without any real profits, it won't reinstate its dividend anytime soon, and it could be overwhelmed by its debt as it liquidity dries up.

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Leo Sun has positions in AT&T. The Motley Fool has positions in and recommends Warner Bros. Discovery. The Motley Fool recommends Verizon Communications. The Motley Fool has a disclosure policy.

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