The Yield on This S&P 500 Stock Tops 10%

There are four telecom services companies among the S&P 500 stocks. Three are pretty well known: AT&T, Verizon and T-Mobile. The fourth is Lumen Technologies Inc. (NYSE: LUMN).

Until mid-September of this year, Lumen was known as CenturyLink. The company, based in Monroe, Louisiana, was perhaps best known for scooping up wireline businesses that other telecom operators wanted to shed. The September name change underscored a shift in focus to the so-called Fourth Industrial Revolution, “when smart, connective devices are everywhere.”

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Compared with the other telecom providers’ market value, Lumen is tiny, with a market cap of around $10.8 billion, compared with Verizon and AT&T, both more than $200 billion, and T-Mobile at around $164 billion.

By one measure, however, Lumen leads the pack. Lumen’s dividend yield is 10.16%, the highest of any S&P 500 stock. AT&T, with a yield of 7.29%, ranks eighth on the index, while Verizon ranks 51st with a yield of 4.26%. T-Mobile pays no dividend.

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Lumen’s payout ratio is 76.5% for the first three-quarters of this year, based on earnings per share (EPS) of $0.98 and quarterly dividend payments of $0.25. AT&T’s quarterly dividend is currently $0.52 per share, and EPS for the first three-quarters of 2020 total $1.19 per share, for a payout ratio of around 76.2%. Verizon’s payout ratio is around 59% for the year to date.

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So far in 2020, Lumen stock has dropped $3.34, far more than the shares have paid out in dividends. Neither AT&T nor Verizon has posted a positive total return for the year to date either, but both have missed by less.

That raises the question of the sustainability of Lumen’s payout. The company’s debt load is around $36 billion, compared to AT&T’s massive debt of nearly $159 billion. Lumen’s free cash flow for the first three-quarters of this year is $18.3 billion, easily enough to both pay its dividend and meet its debt obligations.

Lumen has to figure out a way to put a charge into its share price. The dividend yield, while handsome, is partly a function of that low stock price. Either it needs to tell a better story or it needs to make an acquisition that does not necessarily have to be transformational, but large enough to get more attention. With a cash pile of around $526 million at the end of the third quarter, that likely means more debt. The critical issue is how much more.

Lumen’s stock traded Tuesday morning at $9.80, down about 0.4% for the day, in a 52-week range of $8.16 to $11.39. The consensus price target on the stock is $9.66.

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