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Summary

  • Orange slashed its 2014 dividend by 25%, but still offers an attractive dividend yield of 6%.
  • The company's outlook for 2014 is relatively good, expecting its profitability to be stable after several years of slumping profits.
  • Vivendi's SFR unit may be sold to Bouygues, decreasing the number of mobile operators to three and possibly ending the mobile pricing war.
  • With a stabilization of operating trends in France, Orange's dividend seems sustainable going forward.

I've recently suggested that Orange (NYSE:ORAN) was a risky income investment, despite its high-dividend yield. Today, the company reported its 2013 results and announced a 25% dividend cut, reducing its 2014 annual dividend from €0.80 ($1.10) per share to €0.60 ($0.82). At its current share price, its forward dividend yield is slightly higher than 6% and above the average of European telecoms sector dividend yield, which is about 5%. Orange's dividend related to 2013 earnings was confirmed at €0.8 ($1.10) per share, of which €0.30 ($0.41) was paid in December and the balance of €0.50($0.69) will be paid next June.

Regarding Orange's financial results, in 2013 revenues declined by 4.5% on a comparable basis to $56.1 billion. This weak performance was primarily due to the company's domestic business, where revenues fell by 4.8%. This decline was mainly related to mobile services, reflecting France's pricing war on mobile following Iliad's entry in 2012, leading to lower average revenue per user [ARPU] of 11.5%. Its EBITDA was €12.6 ($17.3) billion, or an EBITDA margin of 30.5%. This represents only a 1% decrease on its EBITDA margin, showing that it is controlling its costs despite its revenue pressure. Going forward, Orange expects its business to stabilize given its outlook for 2014:

Despite persistent pressure on revenues, Orange expects that the restated EBITDA for 2014 will be between 12.1 and 12.6 billion euros, taking into account the continued significant efforts on costs and excluding the impact of the disposal of operations in the Dominican Republic. This objective corresponds to a stabilisation in the restated EBITDA margin compared to 2013. The Group will also maintain its ambitious investment programme in very high-speed fixed and mobile networks.

If Orange is able to maintain its operating profitability in 2014, this will be the first time in at least five years that EBITDA will not fall on an annual basis. The company aims to slash enough costs in 2014 to make up for about three-quarters of pressure on revenues, a more ambitious target than its cost savings achieved in the past two years. Orange's stock price reacted positively in France following the announcement, reflecting primarily this improved outlook. Orange expects that mobile prices are nearing bottom in France, especially after the recent movements toward market consolidation.

Vivendi (OTCPK:VIVHY) is selling the second-largest mobile operator in France called SFR, and received two bids for the unit, including one from Bouygues (OTCPK:BOUYY) which is the third-largest mobile operator, for about $14.4 billion in cash. If Bouygues is successful and takes control of SFR, this will lead to more consolidation and possibly more stable prices. However, Vivendi also attracted an offer from cable group Altice, which may result on the maintenance of four mobile operators in the market. If this happens, the pricing war will probably continue for some more time and revenue pressure will persist for the largest operators. Another telecom operator that may be interested in SFR is Vodafone (NASDAQ:VOD), which was a former shareholder of SFR and has a lot of cash to spend after the sale of its Verizon Wireless (NYSE:VZ) stake.

Conclusion

As expected Orange's dividend was cut by 25%, but it still offers an attractive dividend yield of 6%. The company's operating landscape in France seems to be stabilizing which bodes well for its dividend sustainability, as the domestic market is the main headwind it faces. Orange's outlook for 2014 as well received by investors, judging from its stock price reaction, which could be supported by concentration in the mobile market if Vivendi sells SFR to Bouygues. If the mobile pricing war in France softens over the next few months, Orange's dividend seems sustainable over the long-term making it a more attractive income investment going forward.

Source: Orange: After 25% Dividend Cut, Still Yields 6%