![]() ![]() For a company with lots of debt and almost no free cash flow currently, using that potential source of funds to pay back debt seems like a logical idea. However, even if they clear a billion dollars, for example, that's still a lot of fresh capital to work with. We don't know yet what the after-tax proceeds will be if the deal goes through. The company has also announced plans to sell some of its EMEA assets for $1.8 billion, in a transaction that could close as early as late 2023. As the chart below shows, the financial situation has improved over the past 5 years thanks to prior decent cash flows and a few major asset sales, but there's still a lot of debt here. With guidance calling for cash flow this year of zero to $200 million, it hasn't seemed like a major buyback would be a good idea, especially for a company with a net debt position of almost $20 billion. The board instead decided it would shift the capital return priority to a share repurchase plan, authorizing $1.5 billion that could be used over 2 years. With the company delivering roughly $3 billion in free cash flow a year, there was plenty of financial flexibility in order to pay roughly $1.1 billion in cash dividends. The $0.25 quarterly payout gave the stock the highest annual yield in the S&P 500, which was certainly attracting some income investors. One of the main reasons why Lumen stock crashed late last year is that the board of directors decided to eliminate the dividend. Lumen had about $8 billion in variable rate debt at the end of last year, and although management has been preparing for higher rates, it's not a welcome sign if you hope for better profitability and cash flow moving forward. As the chart below shows, 1-Month LIBOR topped 5.00% last week, continuing its march higher. As I've discussed over the past year or so, rising interest rates are bad for companies like Lumen with a lot of debt, especially if they are variable rate offerings. With the stock falling to just above $2 a share recently, a major decision must be made in the coming quarters.įirst, let me start with some bad news. Shares have lost more than 80% of their value over the past year, as investors continue to worry about the company's cash flow picture and growth situation. Earlier this month, I discussed how shares of struggling communication services company Lumen Technologies ( NYSE: LUMN) were searching for a bottom.
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