Published: January 9, 2008
A state-owned monopoly until 1994,
Magyar Telekom (NYSE: MTA,
$26.47) is now Hungary's largest full-service provider of
telecommunication services. It carries local and long-distance phone
services, Internet-based television, high-speed Internet, cell
phone, and wireless data services.
Roughly 80% of Hungary's phone customers subscribe to T-Com brand,
which markets Magyar's traditional, fixed-line phone services. The
company also dominates the mobile phone business, with a 45% market
share. As well, Magyar provides a full range of telecom services in
the nearby states of Montenegro and Macedonia and has a footprint in
Bulgaria, Romania, and the Ukraine. Magyar is well financed, with
Germany's phone giant Deutsche Telekom (NYSE: DT) holding a 59%
stake in the company.
Dividend: Magyar typically pays a dividend once
yearly, usually in May. The latest distribution of slightly more
than $1.87 went ex-dividend on May 15th and was payable on June 1st.
In addition, the previous year's dividend of slightly more than
$1.85 also went ex-dividend this year. As a result, total dividends
paid to shareholders in 2007 rounded out to $3.73. That gives the
shares a trailing yield of
15.4% of the current price of $24.93 ($3.73/$24.93).
Management has said it seeks to keep its balance sheet flexible for
potential acquisitions. As such, it pegs its dividend payouts to a
targeted debt to total capitalization (which includes debt plus
shareholders' equity) ratio of 30-40%. With the company sporting a
current debt to total capitalization ratio of just 15%, future
dividend payouts should be secure at current levels.
The Budapest-based company maintains a dividend reinvestment plan
and can be contacted via its
website for more information.
Performance Drivers: The local phone business
continues to generate rich and stable cash flows, which amply
support the dividend while also funding future growth.
While the residential telephone service isn't growing, the company
is using the substantial cash flows from this business to acquire
other telecom operators both within Hungary and in surrounding
countries. In October, for example, the company bid on acquiring an
equity interest in Slovenije dd, a telecom provider in nearby
Slovenia.
As well, the company is leveraging its large base of existing
customers to market new broadband, cell phone, and wireless
services. In 2006, Magyar integrated former stand-alone division
T-Mobile Hungary, and more recently, it incorporated Emitel and
T-Online. In addition to reducing administrative expenses, this
integration benefits the company by making it easier to cross-sell
and up-sell services to existing customers.
In the third quarter of 2007, Magyar increased revenues overall
about +2.5% versus the comparable period of 2006. A standout was its
T-Systems unit, which provides telecom services to businesses and
grew its revenues by more than +30% compared to the year-ago period.
Cost-cutting to improve profit margins is another key tactic. Magyar
plans to have -5% fewer group-level employees at its headquarters in
2008, which should provide important cost savings. A simplified
organizational structure based on customer segmentation to be
introduced in 2008 should also lower costs.
Valuation/Outlook: Earnings are estimated to
have grown
about +23% in 2007, and expectations are for growth of +13% in 2008.
Meanwhile, earnings are estimated to
grow around +11%
annually over the next five years. Selling for just ten times next
year's projected earnings, the shares seem reasonably priced,
especially considering the hefty dividend yield.
Action To Take --->
Magyar's telecom operations support a stable yield for income
investors, and the company's strategy of growth through acquisition
and expansion provides it with a positive outlook going forward. The
shares are suitable for investors seeking a stable yield in a
declining interest rate environment.
Good investing!
Carla Pasternak
Editor
High-Yield
Investing
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