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The Ratings Game: Lumen stock falls after dividend is eliminated, but is there a silver lining?

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Lumen Technologies Inc. shares were falling sharply in Thursday trading after the telecommunications company announced it was eliminating its dividend and selling another business, moves that have prompted tough questions about the future of the business.

The dividend announcement came in conjunction with Lumen’s

third-quarter earnings report, which also showed misses on profit and revenue. Additionally, the company announced late Wednesday that it has agreed to sell its business in Europe, the Middle East, and Africa for $1.8 billion.

Shares were down 15% in Thursday afternoon trading.

While the decision to eliminate the dividend came slightly earlier than Citi Research analyst Michael Rollins expected, it wasn’t a surprise.

“Lumen remains at the beginning of a multi-year transition to improve mass markets revenue with investment and improve business segment performance, while absorbing ongoing legacy headwinds,” he wrote. “We believe both the monetization and dividend cut to zero are the right moves to improve its financial flexibility to prioritize future operating investments and manage net debt leverage.”

Rollins continues to rate the shares at neutral.

Cowen & Co.’s Gregory Williams agreed that the dividend cut was “long-awaited,” and he saw opportunity ahead for the company.

Lumen “can turbocharge its growth initiatives” such as automation and fiber-to-the-home, “with a sharper focus while removing a major stock overhang.”

He still anticipated choppy trading.

“As for the stock, expect volatility with a technical wash-out, though admittedly not many yield-oriented investors remaining, and an additional sell-off on the still-challenged fundamentals…counteracted by large short interest covering, and an eventual potential return for value investors, all bolstered with a buyback,” Williams wrote.

He maintained his market-perform rating on the stock while cutting his price target to $8 from $12, writing that “lackluster” third-quarter results in areas like enterprise and fiber builds keep him sidelined.

But in light of the dividend elimination and sale of the EMEA business, MoffettNathanson analyst Nick Del Deo still wasn’t convinced that the company’s efforts will pay off.

“We don’t believe the EMEA deal changes Lumen’s outlook in a material way but do believe eliminating the dividend was the right thing to do,” he wrote in a note to clients as he maintained an underperform rating.

“We won’t know the answer for some time, but the fundamental question we need to ask is: can a streamlined Lumen with a ‘growth-oriented’ management team drive an inflection in the growth rate of the business?” Del Deo asked. “Or will this ultimately prove to be a case where the structural position of the remaining business – significant legacy revenue streams, intense competition, commoditization and cannibalization dynamics, a shrinking industry, and too much financial leverage — is simply too much to overcome?”

In his view, “even talented managers are likely to have trouble turning the ship.”

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