Dialing Up Dividends With France Telecom

| About: Orange (ORAN)

For quite sometime, telecoms have been a staple investment for income oriented investors. Despite the changes that have been sweeping through the industry, the old land line systems have typically been generating sufficient cash flow to both finance the transition into a wireless world, while still allowing for respectable dividends for shareholders.

France Telecom (FTE) is France's incumbent phone company, and France accounts for roughly 50% of its business, at present. FTE has been fairly aggressive in expanding into the emerging markets, notably Poland, which provides 8.9% of its revenues, as well as into the old French colonial regions of Africa, such as Guinea, Guinea-Bissau, Kenya, Morocco, Tunisia, the Central African Republic, and Uganda.

Those who follow events in the old Soviet bloc countries are probably aware that Poland has been the star performer among them, and Poland is the source of just under 9% (8.9) of revenues. Spain provides 8.4%.

FTE has been growing its wireless, VOIP / broadband, and digital television business, as well as its Orange business services segment. Currently, FTE is yielding 5.93%, and is priced 11% below its 52 week high.

Some of the potential negatives about FTE include:

1) The French government owns a 26.7% share, so corporate decisions might be influenced by social / political criteria.

2) Dividends are paid semi-annually (a common practice with European firms) in Euros, so currency fluctuations will have an effect.

3) The firm is heavily unionized, so labor cost cutting measures can be difficult to implement. Despite that, attrition is expected to provide meaningful benefits in that regard, over the next 5-7 years.

4) In the past, the firm has sometimes overpaid for acquisitions.

On the plus side of the ledger:

1) The emerging markets are expected to continue to grow strongly.

2) FTE is ahead of its announced goals to reduce the debt incurred in acquisitions.

3) The dividend only consumes 46% of current free cash flow, indicating that it's comparatively "safe".

While FTE may not be for every income seeking investor, it's certainly worth a long, hard look, particularly for those looking overseas.

Disclosure: I am long FTE.