Debt Refinancing Will Allow Dividend Development for This Excessive-Yield Stock
Over the previous two years, Lumen Applied sciences (NYSE: LUMN) has moved aggressively to chop its curiosity expense by paying down debt and refinancing what it nonetheless owes at decrease rates of interest. This technique has already had a major influence, and the corporate is on observe to make extra progress in 2021. In consequence, will probably be releasing up cash circulation that might be used to fund dividend development.
Curiosity expense has already plunged
In early 2019, Lumen — then generally known as CenturyLink — reduce its dividend by greater than 50%. This transfer displeased earnings traders who had favored the stock for its extraordinarily excessive yield. Nonetheless, it enabled the corporate to begin cleansing up its stability sheet.
Over the previous two years, Lumen has used nearly all of its free cash circulation to pay down a few of its high-cost debt. In the meantime, it has capitalized on the present low-interest-rate atmosphere and its enhancing stability sheet to refinance different high-cost borrowings. In consequence, its curiosity expense declined from almost $2.2 billion in 2018 to round $1.7 billion in 2020.
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Within the third quarter of 2020 — Lumen’s most not too long ago reported quarter — curiosity expense fell to $409 million. Moreover, the corporate continued its refinancing efforts in the previous couple of months of the 12 months. In consequence, it doubtless entered 2021 with curiosity expense at an annual run price of not more than $1.6 billion.
A giant 12 months for refinancing and debt discount
Final week, Lumen’s Stage Three Financing subsidiary issued $900 million of sustainability-linked notes due in 2029 at a really favorable 3.75% rate of interest. It instantly circled and issued redemption notices for an equal quantity of debt due in 2024 that carries a 5.375% coupon. This refinancing will save the corporate about $15 million a 12 months.
Lumen additionally has three vital debt maturities between June and December of this 12 months, totaling $2.Three billion. It ought to be capable to repay these notes utilizing its free cash circulation. Getting these off the books will cut back its annual curiosity expense by one other $151 million.
Lastly, Lumen has been systematically redeeming the “child bonds” issued by its Qwest subsidiary, which all carry rates of interest in extra of 6%. It redeemed almost $1 billion of child bonds final quarter alone, and can be permitted to redeem one other $235 million at par as of Feb. 1. An extra $977 million of child bonds will turn into eligible for redemption on Sept. 1. Assuming Lumen can refinance this debt at a 4.5% price (in keeping with its most up-to-date unsecured debt providing from two months in the past), it could save $25 million a 12 months.
Decrease curiosity expense will allow dividend development
Whereas revenues from some elements of Lumen’s enterprise (like voice service and low-speed DSL) are declining, a lot of the firm’s enterprise could be very steady. It owns an enormous high-speed fiber community that performs a essential position in supporting international communications. With working earnings more likely to develop (or at the very least stay flat), decrease curiosity expense ought to drop straight to the underside line.
Since its early 2019 dividend reduce, Lumen has been paying out lower than 40% of its free cash circulation to traders. That is a really conservative payout ratio for a steady enterprise. This alone supplies ample room for dividend development as soon as the corporate reaches its debt-reduction goal (doubtless within the second half of 2022).
As curiosity expense continues to say no — and as spending that was delayed because of the pandemic lastly hits Lumen’s prime line — free cash circulation may develop additional. That would offer further help for future dividend will increase.
Lumen stock presently yields almost 9%. That top yield alerts that many traders are skeptical of the corporate’s capacity to maintain its present dividend payout. In actuality, Lumen might be well-positioned to begin rising it once more inside a few years. If that’s the case, shareholders might be poised to revenue in two methods: from increased dividend funds and from a leap within the share price as traders reevaluate the corporate’s prospects.
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Adam Levine-Weinberg owns shares of Lumen Applied sciences. The Fintech Zoom has no place in any of the stocks talked about. The Fintech Zoom has a disclosure coverage.
The views and opinions expressed herein are the views and opinions of the writer and don’t essentially replicate these of Nasdaq, Inc.