Belgacom: The Belgian Government's Favorite Cash Cow

Aug.11.14 | About: Proximus Group (BGAOY)


Belgacom has increased its official EBITDA guidance.

As the Belgian government owns 53% of the company and relies on the dividends, the generous dividend policy will very likely continue.

The free cash flow is sufficient to cover the expected dividend of $0.40 per share of BGAOY.

This results in a current gross yield of 5.95%.


In this article I'll have a look at Belgacom (OTCPK:BGAOY), which is one of the few telecom plays in Belgium, a small country in Europe. The company recently positively surprised the market with decent earnings and an improved full year guidance, as it now expects the revenue decline to be less than anticipated. This is something the market didn't expect and the share price moved up nicely.

Trading in Belgacom shares on the US markets can be very illiquid, so I'd strongly recommend to trade in Belgacom shares through the facilities of Euronext Brussels (ticker symbol BELG), where Belgacom is part of the BEL20-index and has an average daily dollar volume of $23M.

Just like the entire sector, Belgacom got hit by aggressive competition

It's no secret that the European telecom sector is being hit by very aggressive competition strategies and several low-cost operators have entered the market through MVNO strategies whereby 'virtual' operators buy capacity from vested players. This wasn't different on the Belgian market and main rivals Telenet (fixed telecom and television) and Mobistar (mainly mobile telecom) were engaged in a 'race to the bottom' which crumbled the operating margins of all companies involved. Mobistar was the first one to surrender and last year it slashed its dividend to zero, whereas it was a true dividend champion before and one of the Darlings of Belgian income investors.

Contrary to what analysts (and even the company) were expecting, Belgacom's revenue decline in Q2 2014 was just 0.9% which allowed Belgacom to revise its full year guidance to an EBITDA decline of 1-2% compared to 3-4% in earlier guidances. This was very well-received by the market and the share price improved. This article is not meant to analyze the earnings report, but to decide whether or not Belgacom will continue to be an attractive dividend investment play.

Why this company will very likely continue to be a dividend champ

It's important to note that 53% of the shares is held by the Belgian government, which relies on the steady dividend streams paid by Belgacom. As such, I'm convinced the government will do everything in its power to make sure a dividend will be continued to be paid out. Last year, the government 'pushed' Belgacom to pay a special dividend, which (together with the normal dividend) caused $490M to flow into the government's treasury. In fact, the previous CEO of Belgacom was fired (the Belgacom CEO's are appointed by the government) after stating in an interview the (socialist) prime minister of Belgium always came begging for a Santa gift (a special dividend) from Belgacom.

So as long as the government is involved (short-sighted politicians would prefer to sell the stake in Belgacom instead of having a long-term perspective and keeping it for its dividend stream), I think Belgacom will be 'massaged' into paying large dividend cheques and I'm expecting a $2 gross dividend for this year ($0.40 per BGAOY-share). That's less than before, but still is a 5.9% gross yield at the last closing price.

Now the most important question is whether or not this dividend rate is sustainable. To find out if Belgacom's dividend can be continued in the future, we need to have a closer look at the company's cash flow statements. In the first six months of this year, Belgacom generated 711M EUR ($953M) in operating cash flow (before working capital changes) and spent 386M ($517M) on capital expenditures. This means that the company had a free cash flow of exactly 325M EUR ($435M). If you'd annualize this, the annual free cash flow would be 650M EUR ($870M). This would be sufficient to cover the currently expected dividend of 1.5 EUR/share ($2), as this would cause an outflow of 'just' 480M EUR ($643M), meaning that 170M EUR ($228M) per year could go to debt reduction and/or other initiatives to strengthen the balance sheet.

Investment thesis

As the government is relying on the dividend cheques and as Belgacom is generating sufficient free cash flow to pay for those dividends, I think the dividend of $2 going forward from here is safe and will be stable. This means that Belgacom could become one of the next 'telecom dividend darlings' as the current yield will be between 5.75 and 6% (the current yield would be 5.97%). There's however one thing I'd like to see different, and that's the geographical focus of Belgacom. From a shareholder's perspective, it might make more sense to expand its operations abroad, but at this point the focus on the Belgian telecom market is a risk I'm willing to accept.

I currently hold a small position in Belgacom which I bought in the summer of last year at less than 20EUR ($26.8). I might write additional out of the money put options to increase my position in Belgacom.

Disclosure: The author is long BGAOY. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

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