The Spanish Telecom That’s Not So Spanish – Thank Goodness! – and its 10% Dividend Yield
Given Spain’s front-row seat in the euro zone crisis, it’s not exactly a surprise that an index of Spanish stocks has pretty much cratered over the past year. But what’s eye opening is that Spanish telecom giant Telefonica (TEF) is doing even worse.
The thing is, Telefonica isn’t a Spanish, or Euro pure play. The company generates the same amount of revenue from its Latin American operations as from all of Europe, so try to put that ugly stock chart out of your mind.
To be sure, total company revenue of late hasn’t been much to call home about.
But peel back a layer or two and there’s a more nuanced story brewing. While Europe-based revenue fell 6.6% in the first quarter of this year, Latin America revenue grew 8.3%. Telfonica’s Brazil unit contributed 23% of revenue for the quarter, about the same as the Spanish business segment (25%).
Telefonica’s Latin America-based cell user base increased 13% in the first quarter and now sits at a not too shabby 170 million. Company wide the net cellular customer base grew by 4.3 million, 1.5 times the pace from a year earlier.
Clearly, branding Telefonica as a pure Spain/Euro play misses the point. That’s something management is working to shift; in discussing its first quarter results, the pooh-bahs didn’t get around to talking about the Spanish business until page 15 of the handout.
Still, there is no getting around the drag that is Europe. Late last year, Telefonica announced it was reducing its dividend in 2012 and 2013 by about 14%. While there is more than $7 billion in cash and short-term investments in company coffers, that cushion has been falling of late, while long-term debt to finance growth has been on the rise.
Headwinds? You bet. But take a look at the current valuation -- that's a tiny PE ratio.
That’s a pretty low valuation for a company that still posted $60 billion in gross profit over the trailing 12 months, has free cash flow of more than $12.5 billion and is focused on growth in the healthy Latin America region. Oh, and at today’s low entry level, the reduced payout provides a dividend yield of 10%. Roughly double the yield offered these days by AT&T (T) and Verizon (VZ).
Filed under: Investing Ideas