France Telecom (FTE) is facing harsh competition amid a sluggish European economy. The increase in Eurowide tax rates further added to the issues, causing the French economy to post slow growth. This greatly affected France Telecom, as well. The company reported declining revenues and net losses. While it continuously gave out yearly dividends to its shareholders, the payout amount is decreasing.
France Telecom-Orange is still one of the biggest telecom operators across the globe. In fact, the French postal and telecom regulars ARCEP named Orange as the number one mobile network in France. The company offers the highest speed in mobile broadband. It also bested its competitors for mobile network quality.
In spite of that, its feat in France and its extensive global footprint did not reflect its performances on the trading floor. FTE shares continue to ride downhill. Many shareholders holding FTE for its dividend yield are now starting to flee. Some have already sold their position to minimize loss. Others are still hoping for a rebound. But the question right now remains if France Telecom is still a profitable investment amid the declining share prices.
On April 24, France Telecom released its 1st quarter earnings report. The company highlighted the 2.6% year-on-year increase in total customers. The first quarter ended with more than 5.9 million new customers. As of March 31, the firm had 229.8 million strong customer base.
Also in the spotlight was the 1.3% year on year increase in mobile customers in France. Its mobile services in the Middle East and Africa also expanded and grew 8.2% year on year. In Spain, its ADSL customer base grew 11.1%, while its mobile contracts increased by 9.7%.
However, the consolidated revenue declined by 1.8% at 10.3 billion Euros. The price war against its competitors took a toll on FTE's revenue on mobile services in France. It saw a decline by 2.9% during the first quarter. In contrast, revenue in Spain grew by 3.3%. This was driven by growth in the number of customers for fixed broadband and mobile services.
France Telecom offers a rare double-digit dividend yield. Year over year, the company consistently gave out dividend since 2001. While dividend growth fluctuates, the payout amount has been at least $1.3 per share for the past 5 years. This is relatively higher compared to its peers.
In the fiscal year 2012, FTE paid a total of $1.7586 in dividends per share. In 2008, the company paid $2.7743 per share. The amount was slashed down in the ensuing years to $1.9677 and $1.8087 in 2009 and 2010, respectively. But in 2011, the dividend was increased to $2.0186 per share.
When the company announced a drastic cut in dividend, there was mixed reactions on the trading floor. The announcement triggered a radical decline in FTE shares during the early months of the fourth quarter 2012. Shares eventually plummeted towards the lowest price point of the year.
For the fiscal 2013 and 2014, the management projected a minimum dividend payout of $1.04 per share. This is a 40% cut from the 2012 dividend payout amount. The company slashed down the dividend in order to align itself with the projected decrease in operating cash flow in the next two years.
The low dividend projection caused some dividend-investors to flee, causing shares to fluctuate. But some traders still find the $1 dividend payout a good amount compared to other companies that gave out pennies.
France Telecom-Orange had a pretty impressive start in this year. Shares were upbeat, as it continued to rally after hitting the 2012 bottom at $10.31 on November 16. It hit the peak of the year at $12.08 on January 18, a growth of 7.8%. Since then, shares traded downward and plunged to the lowest price-point for 2013 at $9.60 on February 26. The share price posted ytd return of -14% on that day.
However, the shares rebounded as quickly as the plunge; although, it never fully recovered back to the high price-point level. From thereon, shares continued to fluctuate. As of May 16, it closed at $10.48 with a ytd growth of -6.4% from $11.20 starting price of the year.
The share performance of France Telecom is quite disappointing compared to its closest peer, Iliad (EPA: ILD). While FTE posted negative year-to-date growth, Iliad gained 35% in the Paris Exchange market.
Iliad: A Growing Threat to FTE
France Telecom remains the industry leader in the region and one of the largest telecommunications company in the world. But it is facing growing threat from Iliad. Iliad is giving free and low-cost mobile phones. The firm also offers no-contract plans, further attracting more customers.
Iliad's free and low-cost mobile phones have stirred the telecom market. Its competitors, including FTE, were forced to lower down their packages to stay competitive. The free mobile packages captured 870,000 more subscribers during the first quarter of 2013. This remarkably boosted the total mobile subscribers of Iliad that already summed up to more than 6 million. This represents about 9% of the French market.
Aside from outperforming FTE on the trading floor, Iliad also has a more robust financials. While France Telecom's total revenue is declining, Iliad steadily sees growth in total revenue. For the first quarter of 2013, Iliad reported revenue growth of about 40% at €907 million.
Despite the present challenges, France Telecom remains financially stable with a strong market capitalization of $28 billion. Its forward P/E ratio of 6.5 is one of the lowest in the industry. It also pays a substantial dividend that is comparable to mREITs.
However, investors are encouraged to properly balance the dividend gains against capital losses. Many long FTE investors are losing because the share price is generally downbeat within the 5-year span. If you expand the historical prices further to 10 years, the trend is still downward.
For some investors, gains from dividends were not enough to erase the losses on the trading floor. However, there are sharp fluctuations along the way. This creates excellent opportunities for short FTE to make profits on top of the regular dividend yields. Currently, the stock also looks cheap as it is trading 25% below its 52-week high.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: Efsinvestment is a team of analysts. This article was written by one of our equity analysts. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.