Cellcom's (CEL) stock has been very volatile in recent months, jumping from its low of $4.98 this past July to $9.98 this past November. The stock is currently trading at $7.60- the marker right in between its recent high and low. So where is the company heading?
In 2011, the company paid a trailing dividend yield of more than 12% attracting many investors seeking super high yields. But unfortunately, on November 12, 2012, the company's board of directors decided not to declare a cash dividend for the third quarter of 2012. The company stated that in making its decision, the board of directors considered the company's dividend policy and business status and determined, that although the company can satisfy its existing and foreseeable obligations with a dividend distribution, given the continued intensified competition and substantial changes in pricing and their continued current and expected adverse effect on the company's results of operations, the company should wait for the competitive situation to clarify, to strengthen the company's balance sheet and not distribute a dividend at this time.
Seemingly, investors should have dumped their positions due to the betrayal of Cellcom to shareholders trust of a promised high value dividend. To be fair, the stock did initially plunge from $9.09 to a low of $8.55 the next day, but over the next ten days, the stock hit a high of $9.90. Although outraged by the lack of dividend investors returned to the stock. Investors were satisfied with the company's action to fix its balance sheet rather than payout a dividend that would drive it to bankruptcy.
The company's stock is currently undervalued, with a trailing price-to-earnings (P/E) ratio of almost 6 and a PEG ratio of 0.67. Total cash on hand of $4.29 per share and an expected profit of nearly $4 per share this year just show how the company's metrics are positive .
The company's existing infrastructure limits it to 3G service, while the competition has upgraded to much faster 4G service. This caused Cellcom's earnings to plunge 38% in the third quarter of 2012 to 32 cents a share, while revenue also fell 13% to a little more than $370 million during the same period.
Why To Buy Cellcom Now?
Cellcom has recently launched certain measures to match its reduced revenue. Free cash flow has actually ramped up by 58% to $106 million in the third quarter of 2012 compared with a year earlier.
The company recently won a military contract and it's making plans to enter the Internet TV business. Still, it may be a rough few quarters before this major Israeli telecom starts paying dividends again.
The stock price will jump once shareholders can once again trust the company, which I think will happen once the company pays out its fourth quarter dividend which it seems capable of doing, based on the company's outlook of the next quarter.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in CEL over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.