Stocks to buy
  • Inching higher since its big February drop, Lumen Technologies (LUMN) is still a cheap stock with a high yield.
  • With its restructuring a work-in-progress, share price performance could stay lackluster in the short-term.
  • Even so, as a value play that could pay off over a long timeframe, LUMN stock remains a great choice.
Source: T. Schneider via Shutterstock

If you’re familiar with Lumen Technologies (NYSE:LUMN), “value trap” may be a term that comes to mind. LUMN stock has been cheap for several years. The telecom company has also been active in trying to bridge the gap between its trading price and underlying value.

But while it has pursued moves to unlock value, this is still a work-in-progress. Interest in this stock has ebbed-and-flowed since 2021. After dropping sharply two months back, bullishness has started to return. Since February, it has inched up from around $9.50 per share to around $11.40 per share.

At today’s prices, it remains very cheap. The stock also has a high dividend yield of 8.77%. The market has taken, and could continue to take, a “wait and see” approach with it in the short-term. Yet, on a longer time horizon, its transformation, along with return-of-capital efforts, could make it a very worthwhile investment.

LUMN Lumen Technologies $11.41

LUMN Stock at a Glance

Formerly known as CenturyLink, Lumen is the end result of several decades of telecom mergers. At present, the company is a hodgepodge of legacy and more modern telecom businesses, serving both residential and commercial customers. However, it is in the process of streamlining operations.

It is currently selling its incumbent local exchange carrier (ILEC) operations. Funds managed by private equity firm Apollo Global Management (NYSE:APO) are buying them for $7.5 billion. This deal is set to close later this year. Along with a pending $2.7 billion deal for its Latin American segment, the heavily leveraged company is about to receive a large cash infusion.

This cash will help it pare down the long-term debt of $27.2 billion on its balance sheet. The asset sales also provide it with capital to invest into its next-generation lines of business. Moving away from its roots as a legacy phone company in decline, in theory this transformation, combined with de-leveraging, should result in big gains for LUMN stock.

Especially as the company also continues to use its cash flow to aggressively buy back stock. Nevertheless, keep in mind that the “payoff” for shares may take time to arrive.

Patience is Key When it Comes to Lumen

In time, as it goes from being mostly a provider of old-fashioned phone service to mostly a provider of more modern services, like edge computing and quantum fiber, LUMN stock could soar in price. This is in thanks to both increased earnings, as well as from multiple expansions.

However, until this transformation completes, there is a good chance shares don’t move too far away from current prices. Its faster-growing lines of business have a lot of catching up to do before they make up for the negative growth/zero growth of the company’s remaining legacy business lines.

On the flipside, while an upwards surge may take time, downside risk appears minimal. Trading for 8.5x estimated earnings, it already trades at a highly discounted valuation. In addition, there is the stock’s high yield, although it is not guaranteed this will continue to provide a floor for shares.

Although its 2022 outlook signals it has the cash necessary to maintain it, concerns about a possible dividend cut could always arise. Also, rising interest rates may dampen the appeal of its high yield. This is something my InvestorPlace colleague Stavros Georgiadis pointed out in his cautious take on the stock last month.

For Long-Term Value, Consider LUMN Stock a Buy

With the prospect that it continues to languish at or near today’s prices, I can see why you may not find Lumen stock all too appealing. But remember that besides the fact its high dividend will “pay out while you wait,” management has another way to return capital to shareholders and help move the needle in the process.

That would be share buybacks. The company bought back $1 billion worth of shares last year. It likely has the ability to do this again. Compared to its market capitalization of $11.68 billion, buying back another $1 billion worth of shares would help boost returns.

It is definitely not the most exciting stock out there. It is also not an opportunity that will quickly pay off. Yet, if you’re an investor with a long-term horizon, and are on the prowl for value, consider LUMN stock a buy.

On the date of publication, Thomas Niel held a long position in LUMN. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Thomas Niel, contributor for InvestorPlace.com, has been writing single-stock analysis for web-based publications since 2016.

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