Buyback Wednesdays – Lumen Technologies Announces A Two-Year $1.5 Billion Stock Buyback

An astonishingly large number of companies announced stock buybacks over the last week with 42 companies announcing repurchases compared to 27 in the prior week. It is interesting to note that 11 out of these 42 companies have announced buybacks of $1 billion or more.  A couple of huge buybacks that did not make our list of top 5 buybacks are, the $5 billion buyback by DuPont de Nemours (DD) and the $20 billion additional buyback by ConocoPhillips (COP) representing around 16% and 12% of their market caps at announcement respectively. DuPont dropped its acquisition of Rogers (ROG) last week and is now choosing to repurchase its own stock instead. 

The buyback that stood out last week was announced by Lumen Technologies (LUMN). Lumen, formerly CenturyLink, is a telecommunications company that provides communications, network services, security, cloud solutions, voice, and managed services.

The stock lost more than half its value over the last year and is currently trading at $6.34, close to a three decade low for the company. We have recently started seeing some insider buying at Lumen. On November 4, three different Directors picked up a total of 43,000 shares at prices below $6.

The company’s dividend had been shrinking over the years from a peak annual payout of $2.90 in 2010 to $1 in 2022. Given the decline in the stock price, the company was sporting a double digit dividend yield. Lumen Technologies announced in its Q3 earnings press release that it will eliminate its stock dividend and that there would be no dividend paid in Q4 2022. The company plans to replace the dividend with a $1.5 billion share buyback over the next 2 years. This represented nearly a fourth of the company’s market cap at announcement. The dividend payout would have cost LUMN approximately $2.0 – $2.1 billion over the next two years, so this decision is expected to save the company $500-600 million.

Lumen’s revenue grew significantly in 2018 because of the acquisition of Level 3 Communications in a deal valued at around $25 billion. The Level 3 deal was perceived as a takeover from the inside because Level 3 shareholders were willing to approve the deal if CenturyLink’s CEO and CFO retired. Eventually the entire management team at CenturyLink was replaced with Level 3 managers.

The Level 3 acquisition left Lumen with a massive debt load of $37.5 billion. Unfortunately, after an acquisition related bump in revenue in 2018, revenue kept declining in each of the next three years. Some of the decline in revenue was on account of asset sales. The company’s operating earnings improved during this period of declining revenue and it managed to pay its debt down to the $25 billion level. Lumen generated nearly $2.5 billion in free cash flow over the trailing twelve months and 2021 free cash flow exceeded $3.5 billion.

In the past couple of months, Lumen generated pre-tax net cash proceeds of about $8 billion from two deals. One was the sale of its ILEC (incumbent local exchange carrier) business in 20 states to Brightspeed for $5.6 billion in cash and the other was the divestment of its Latin American operations to Stonepeak for $2.7 billion in cash. This will help the company pay down its debt some more. The buyback announcement in light of these divestitures and the fact that the company trades at an EV/EBITDA below 5 makes sense.

Lumen Brightspeed Transaction Map

Lumen Brightspeed Transaction Map (click to enlarge)

Welcome to edition 32 of Buyback Wednesdays, a weekly series that tracks the top stock buyback announcements during the prior week. The companies in the list below are the ones that announced the largest buybacks as a percentage of their market caps. They are not the largest buybacks in absolute dollar terms. A word of caution. Some of these companies could be low-volume small-cap stocks with a market cap below $2 billion.

Top 5 Stock Buyback Announcements 

1. The ODP Corporation  (ODP): $41.63

On November 2, 2022, the Board of Directors of this office products retailer approved a new share repurchase program authorizing the company to repurchase up to $1 billion of its class A common stock equal to nearly 52.2% of its market cap at announcement.

Market Cap: $1.86B Avg. Daily Volume (30 days): 414,211 Revenue (TTM): $8.43B
Net Income Margin (TTM): -1.48% ROE (TTM): 10.35%  Net Debt: $425M
P/E: 11.21 Forward P/E: 9.47 EV/EBITDA (TTM): 6.04

2. Select Medical Holdings Corporation (SEM): $22

On November 3, 2022, the Board of Directors of this healthcare operator approved a new share repurchase program authorizing the company to repurchase up to $1 billion of its class A common stock equal to nearly 33.5% of its market cap at announcement.

Market Cap: $2.85B Avg. Daily Volume (30 days): 774,871 Revenue (TTM): $6.31B
Net Income Margin (TTM): 2.87% ROE (TTM): 13.49%  Net Debt: $4.86B
P/E: 13.33 Forward P/E: 8.52 EV/EBITDA (TTM): 14.09

3. Lumen Technologies, Inc.(LUMN): $6.34

On November 2, 2022, the Board of Directors of this telecommunications company approved a new share repurchase program authorizing the company to repurchase up to $1.5 billion of its class A common stock, representing nearly 25% of its market cap at announcement.

Market Cap: $6.25B Avg. Daily Volume (30 days): 22,421,794 Revenue (TTM): $18.52B
Net Income Margin (TTM): 10.95% ROE (TTM): 17.08%  Net Debt: $25.38B
P/E: 2.96 Forward P/E: 7.89 EV/EBITDA (TTM): 4.54

4. Qorvo, Inc. (QRVO): $88.14

On November 2, 2022, the Board of Directors of this IT company approved a new share repurchase program authorizing the company to repurchase up to $2 billion of its class A common stock equal to nearly 23% of its market cap at the announcement.

Market Cap: $8.93B Avg. Daily Volume (30 days): 1,347,520 Revenue (TTM): $27.55B
Net Income Margin (TTM): 4.7% ROE (TTM): 27.16%  Net Debt: $7.10B
P/E: 13.63 Forward P/E: 13.35 EV/EBITDA (TTM): 7.42

5. Daqo New Energy Corp. (DQ): $52.3

On November 7, 2022, the Board of Directors of this polysilicon manufacturer approved a new share repurchase program authorizing the company to repurchase up to $700 million of its class A common stock, equal to nearly 20.3% of its market cap at announcement.

Market Cap: $3.83B Avg. Daily Volume (30 days): 1,264,136 Revenue (TTM): $4.14B
Net Income Margin (TTM): 39.34% ROE (TTM): 52.23%  Net Cash: $3.08B
P/E: 2.41 Forward P/E: 2.47 EV/EBITDA (TTM): 0.85

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Voluntary Disclosure: I hold a long position in Rogers (ROG).

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