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Published: April 5, 2010
Large telecom providers have become some of the
market's strongest dividend-paying companies.
Although they pay strong yields, most of the big U.S. telecoms
don't offer much in the way of growth. The problem is that
fixed-line usage is slowly dying as more customers drop their
wired phones for wireless ones. Wireless, for its part, is a
highly saturated market with stiff competition.
However, investors can find a place that offers solid growth in
wireless -- the developing world. One emerging-market telecom
company in particular gets the best of both worlds and serves up
the steady telecom cash flow found in developed market economies
combined with the growth of emerging markets.
The combination of steady cash flow and earnings growth enables
the company to pay a high yield while offering appreciation
potential.
The company has one more advantage. It's cheap.
Telefonica (NYSE: TEF) is the world's third-largest telecom
company, as measured by the number of customers. It's the
largest telecom in Spain and Latin America. Telefonica's reach
also extends to Europe, where it's the largest wireless operator
in the United Kingdom and the Czech Republic. It's also a major
provider in Germany.
The company operates in three primary regions: Spain, Europe and
Latin America. About 65% of revenue come from outside Spain. The
mature and slower growth Spanish and European markets offer
steady cash flow. But the company's growth engine is Latin
America, as the number of customers who use wireless and
broadband is just a small fraction of those in the developed
world.
A huge benefit of Telefonica is that it pays an already solid
dividend -- and one that's growing.
The company pays dividends twice a year. These payouts have
increased every year since 2003. A total of EUR1.00 per ordinary
share was paid in 2009. Each of the NYSE-traded depositary
receipts represents four common shares, so investors here
received a dividend of EUR4.00. At today's price and currency
conversion, the trailing yield is approximately 7.5%.
The dividend is well covered. Telefonica earned EUR 1.71 per
share in 2009 and paid out EUR 1.00 per share in dividends.
That's a modest and manageable
payout ratio of just 58%.
The best part about Telfonica for income investors is that the
company has announced its intention to steadily raise the
dividend. Its target payout is EUR 1.75 per share by 2012, a
+75% increase from 2009.
Telefonica reported a consistent performance in a brutal,
recession-riddled 2009. For the full year, revenue grew +0.2% to
EUR 56.7 million. A key measure of telecom performance --
operating income before depreciation and amortization --
increased +0.9%, to EUR 22.6 million.
Net income increased to EUR 1.71 per share from EUR 1.63 per share the previous year.
The company seems to be gaining momentum. In the fourth quarter,
net profit jumped +22%, to EUR 2.44 billion. The surge in
performance was driven by adding 6.8 million customers, mostly
in Latin America.
Telefonica has recently taken a beating as investors worried
about recession in Europe and particularly Greece's financial
woes. These concerns seem overblown -- most of the company's
revenue comes from outside Spain, after all -- though the shares
have shed -20% of their value, falling to about $72 from $90 in
December.
With a rich yield of 7.5% and strong price appreciation
potential, these shares warrant serious consideration by income
investors. The recent sell-off has created a golden opportunity
to enter one of the most well diversified and best-run telecom
companies in the world.
-- Tom Hutchinson
Staff Writer
StreetAuthority |
