![]() By vertical comparison, its current financial conditions have deteriorated substantially in the past year as seen in the chart below (top panel). LUMN’s balance sheet is just too stretched in my view, either by horizontal or vertical comparison. I will focus on the first in this section and the next section will explain my concerns on the profitability front. I am concerned about LUMN on both fronts. Ultimately, what makes a dividend sustainable are strong balance and healthy profitability. Source: Seeking Alpha data LUMN’s balance sheet is too stretched And the second goal is to explain why I remain pessimistic about LUMN’s outlook. ![]() The first goal is to illustrate how these commonly quoted payout ratios can be misleading. The remainder of this article will further examine their finances and business outlook with two goals. And its cash payout ratio is remarkably consistent around an average of 45%, much more consistent than VZ’s. The fluctuations in its earnings payout ratios could be explained away by the discrepancies between its accounting EPS and true economic earnings. Just by eyeballing the data, LUMN’s payout ratio seems to be just fine (even better than VZ’s from certain angles). For example, the next chart shows LUMN’s payout ratio (VZ’s ratios are provided for comparison purposes). What gets us into real trouble is not what we do not know. And this is where the real danger comes in: these payout ratios can be misleading. The use of payout ratios is one such method, probably the most widely used method. Of course, most dividend investors are aware of these risks and are also well-versed in the methods to identify these risks. ![]() In many cases (and LUMN is such a case in my view), a company’s yield is high only because it stubbornly refuses to cut payouts even though it cannot afford it already for fear of losing investors. These risks include the possibility of a dividend cut, total elimination (like in LUMN’s case here), or financial trouble. However, investors chasing high yields need to be aware of the risks too. And a high yield could also provide a source of funds for reinvestment and exponential growth (for example, via the famous DRIP method, dividend reinvested investment program) ![]() A high yield could signal undervaluation. Besides being a round and nice number, there are probably some good fundamental reasons. Due to the lack of growth potential, the stock is actually more expensively valued than VZ in my view despite its dramatic price corrections.Ī 10% dividend yield seems to hold a magic ring to dividend investors.LUMN is suffering from a high leverage ratio and structural underinvestment. I am concerned about LUMN’s outlook for both the top and bottom lines ahead.In this case, I feel a comparison and contrast is the best way to illustrate my thesis. I will anchor my consideration via a direct comparison against VZ. Then I will explain the following main considerations to remain pessimistic about the stock despite its large price drop. I believe these lessons are of general relevance to dividend investors. In the remainder of this article, I will first summarize the lessons I learned (relearned) from the LUMN example. It directly competes with Verizon ( NYSE: VZ) and AT&T ( T).Īnd the thesis of this article is to argue against such bottom-fishing attempts. After all, LUMN (formerly known as CenturyLink) is a leading telephone company in the U.S., providing a range of services (voice, wireless services, et al) to a sizable customer basis. With such a large price drop, many investors are probably thinking about some bottom fishing here. The stock price collapsed at the same time, suffering a total loss of more than 80% as shown in the chart below (in contrast to the sector gain of 14.6%). In November 2022, the company announced the elimination of its cash dividend payouts (while authorizing a $1.5M share buyback). Indeed, the company had to eliminate its dividend shortly afterward. Plus, a casual look at the commonly quoted payout ratios (more on this later) would show that the dividend payouts are safe.Īnd the purpose of my original article was to caution investors about the high yield and point out some of the hidden warning signs – hidden from the common payout ratios. At that time, the stock was trading at a price of $9.97 per share and paid a quarterly dividend of $0.25 per share, translating into an FWD yield of more than 10%. About a year ago (September 9, 2022, to be exact), I published an article on Lumen Technologies ( NYSE: LUMN) entitled “Is 10% Yield Too Good To Be True?”.
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