Lumen Stock: 11.2% Yield On My Last Purchase (NYSE:LUMN)

My most recent Lumen Technologies Inc. (NYSE:LUMN) investment yielded 11.2%.

Lumen Technologies is on my truck because inflation-driven fears have recently decimated the valuation of this free cash flow winner.

Despite the present market downturn, Lumen Technologies is very likely to maintain its $1.00 per share yearly dividend. I have locked in a consistent, sustainable, and covered 11.2% dividend yield at a weighted-average purchase price of $8.95 per share and believe that the valuation has declined to an unjustified level.

Lumen Technologies has a very strong margin of safety at its current price.

What Happened?

The Dow Jones Industrial Average plummeted nearly 1,300 points on Tuesday after August inflation data was released.

The annual rate of inflation in August was 8.3%, causing investors to panic as they believed the central bank would continue to raise interest rates aggressively in 2022. With further large rate cuts on the way, which are largely viewed as bad for the market, values have dropped through the floor, presenting a buying opportunity for investors with cash to deploy.

Lumen Technologies’ stock has plummeted near, and then passed, the $9 level as a result of this selloff. Lumen Technologies’ free cash flow has thus begun to trade at a significant discount, and I advocate capitalizing on the reduction in valuation.

Lumen Technologies impresses not only with a dividend yield of 11.2%, but also with outstanding free cash flow.

Lumen Technologies easily pays its dividend with free cash flow, as I demonstrated last time, but the current pricing is so ludicrous that I couldn’t help but load up the truck.

Lumen Technologies Has A Ridiculous Free Cash Flow Multiple

The 11.2% yield on Lumen Technologies is not the only reason to buy the stock. The other is a low free cash flow pay-out ratio.

Lumen Technologies’ yearly dividend payment of roughly $1.0 billion is expected to be easily covered by free cash flow. The business plans to generate $2.0-2.2 billion in free cash flow in 2022, resulting in a free cash flow pay-out ratio of 45-50%.

This pay-out ratio strongly shows that Lumen Technologies’ 11.2% yield is not as outlandish or unstable as it appears, but rather that the market has become overly gloomy in its pricing of free cash flow.

Lumen Technologies’ stock is valued at 4.5x free cash flow, with $2.0-2.2 billion in free cash flow forecast for 2022, a valuation that I don’t think will last long. The telecommunications company recently reaffirmed its financial estimate for 2022, which includes a free cash flow potential of $2.0-2.2 billion.

Catalyst: $7 Billion Cash Infusion

Lumen Technologies has sold historic assets in the United States and Latin America, and the business expects to get $7 billion in cash when regulators approve the transactions.

Lumen Technologies intends to use some of the proceeds to repay some of its outstanding long-term debt, which totaled $28.0 billion as of June 30, 2022.

Lumen Technologies, with an equity market value of $9 billion, needs to do more to reduce its debt. Lumen Technologies will be able to fix its balance sheet and maintain its dividend thanks to the $7 billion financial infusion.

Why Lumen Technologies Stock Could Fall

Lumen Technologies’ telecom legacy business is experiencing growth challenges, but it has a chance to expand its quantum fiber operations, which are generating significant customer demand.

Having said that, Lumen Technologies continues to generate significant free cash flow from its telecom assets, which is more than enough to cover the dividend. If Lumen Technologies’ free cash flow falls, its valuation may fall.

My Conclusion

Buy, buy, buy the drop.

Lumen Technologies’ free cash flow is excellent, as is its 11.2% dividend yield, which is well supported by free cash flow.

Lumen Technologies’ stock is incredibly appealing, with a free cash flow multiple of 4.5x, and offers (income) investors a genuinely extraordinary margin of safety.

Because Lumen Technologies will also get a cash payout of approximately $7 billion from asset sales in the second part of the year, the company will have both a trigger for a higher valuation and funds available to cover at least some of its increasing debt.

To summarize, I believe Lumen Technologies’ free cash flow has become excessively cheap, and investors should move swiftly before the market corrects its error.