(wow) Words Of Wonders Level 1109 Answers – When Lumen Technologies (NYSE: LUMN) suspended its dividend in favor of a share buyback in November 2022, the market reaction was swift and brutal, with its share price immediately falling more than 10% on the news and continues ever since. remain under additional sales pressure. Although the end of this year is very disappointing, I think it is a real boon for income investors as they consider the mid-term impact and the long-term impact of their new shareholder return policy.
In recent years, the high single-digit to low double-digit yields have often attracted the attention of many income investors, although there have always been concerns about their safety and are often discussed. Whether sitting in the bull or bear camp, unfortunately many investors were caught off guard when their shares weren't just cut, but instead stopped to buy back, as the management statement below notes.
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“Today, we announced that we are canceling our dividend and implementing a two-year share repurchase program of up to $1.5 billion. “
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Love the opportunity or hate it, management believes that stock buybacks provide a better opportunity for shareholders to create value and appear to be on track to program Their $1.5 billion will be completed at $750 million per year in volume over the next two years. Despite leaving shareholders without money flowing directly into their pockets, share renewal is still not on the agenda forever, as mentioned in the statement management below.
“Returning value to shareholders is Lumen's top priority, and we believe that sharing is an appropriate way to deliver value. However, we also said that our board will regularly assess whether this approach according to the current circumstances.”
Anyone familiar with my articles over the years may remember that I often criticize companies that focus on share buybacks over shares, and although I prefer the -living shares, I see situations where they create value or provide tangible benefits. They mainly criticize the purchase of shares in oil and gas or coal companies, which, unlike the current situation, face a highly cyclical financial performance that may be more cyclical and lower levels of cycles, which are therefore counterintuitive. as the old saying goes, buy low, sell high. Furthermore, in this era of clean energy, they also have an uncertain long-term future, and since buybacks are an investment back into the company's operations , it creates uncertainty about their material medium and long-term benefits.
Fortunately, none of these topics are particularly relevant in this situation, so I don't necessarily see these share buybacks as a bad option for shareholder returns, which despite my love of shares. Regardless of whether they buy back their dividend again, fortunately they have enough free cash flow to carry out their current share buyback program.
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Thanks to their recent stable cash flow performance, they have consistently generated an average of $3.149 billion in free cash flow annually from 2019 to 2021. Even with smoother operating cash flow through the nine months of 2022, they still generated $1.711 billion in free cash flow and could theoretically complete the entire $1.5 billion buyback program in less than a year. This means his current annual rate. Getting to $750 million is easy. In addition to increasing the expectation of a faster rate in the future, this also means that there is a large margin of safety, which in turn removes most doubts about whether their buyback program completed within two years. With a massive net debt pile of $24.986 billion, it's no surprise that they are limiting share buybacks well below their free cash flow to facilitate deleveraging, which in itself is beneficial.
For valuation, I usually choose a discounted cash flow valuation that uses their dividend payments, but the lack of dividends obviously precludes this approach. Although their free cash flow could instead be used in the usual way in the financial sector as it goes towards deleveraging and buybacks, in my eyes it is a ‘ hide its true value because the material part does not end up in the pockets of shareholders. As a result, this time I will take an approach that provides very conservative estimates when examining the impact of these share buybacks.
At the end of Q3 2022, they had 1,034,758,000 shares outstanding, and at their current share price of $5.30, this represents a market capitalization of approximately $5.5 billion. If their stock price remained unchanged, their buybacks of $750 million a year would wipe out all of their stock in just over seven years.
That's not to say that such an outcome is impossible so something has to give one way or another. With the very large margin of safety between the free cash flow and the buyback program, they are unlikely to be diluted, which will put pressure on their share price as will the number of outstanding shares. going down Theoretically, their share price should rise in line with the smaller number of shares they own, keeping their market cap stagnant and yielding highly desirable returns.
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Examining the results of this situation, it is easy to see the benefits of their share buyback after completing their two-year $1.5 billion program, bringing the share price have to $7.00. This would mean an increase of almost a third of its current share price, which gives a compounded annual return of almost 15%. After that point, it remains uncertain whether share buybacks would continue to outperform dividends, but if they did, it is clear that they would continue to deliver the same compound annual return for years to come, as their share price reaching 10 in five years. . 63 US dollars.
Although a capital gain of 15% per annum is not necessarily an all-time high, it is likely to outperform much of the market and is therefore still highly desirable, especially as it comes from a very conservative position where their market cap remains unchanged. Additionally, this comes with deleveraging as, as mentioned, they are reducing share buybacks to help deal with their large net debt pile.
With their share price down just over 50% year to date, it seems safe to say that their current market cap is not high and unaffected by inflated expectations. If anything, their share price may recover in the short term after falling nearly 30% following the division ban, but for now, that possibility is being ignored for the day- quick pay and the focus is instead on the medium to long. – basic term. – capacity term. Obviously, if their share price retreated while increasing their market cap, this would reduce the effectiveness of their buyback compared to this scenario, although this may not be negative as investors will receive even greater capital gains. In addition to increasing the share price in the medium and long term, these share buybacks also significantly increase their future dividend potential.
An examination of their results shows that if their shares are reset in two years, after implementing the existing share buyback program, the They have annual dividends of about $1 billion to fund annual dividends of $1.28 per share. In addition to offering a whopping 24% dividend yield from current costs, this would represent an impressive 28% increase over last year's dividend of $1.00 per share. If they were to reset their share at this level, I would expect their share price to recover significantly and well above the estimated real holding potential of $7.00 before while investors were rushing to get hold of this huge source of income.
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As of now, it is not certain whether the management will renew the department in two years or not. While uncertainty is usually the enemy of investors, luckily the potential for future dividends will increase if they renew their buyback program, even assuming they only have $750 million per year available to ease the additional pain. – wait a long time.
Looking back at these results,the future dividend potential under this scenario would eventually see its annual dividends reach $1.94 per share in year five, still paying out just $1 billion a year, which is an insanely high yield of 37% compared to current costs. As before, this assumes that their market cap remains unchanged, and even if it is, a rally would reduce the effectiveness of their buybacks and thus their future dividend potential, which -again, it's not worth complaining about a higher share price.
Income investors are still hurt by the loss of their previous single-digit dividend yield, but luckily hope is not lost, as their $1.5 billion share buyback program expire in two years, and any renewal of that sector is still in question. . If they don't have them