Emerging Markets Could Drive Growth For These 4 European Telecoms

by: Power Hedge

It would be surprising if any investor today is unaware of the growth potential that emerging markets offer. Many of these markets are growing their economies at a much faster rate than the developed markets here in the West and many of these emerging nations do not have the debt and deficit problems plaguing the United States and Europe. On the flipside, emerging markets typically do not have as developed a regulatory framework as more developed Western nations. Emerging nations also generally lack the investor protections that we enjoy in developed markets. Nevertheless, it would be a good idea to have some portion of your portfolio invested in emerging markets given the potential that these areas have.

But, what if you could have the best of both worlds? There are many companies based in developed markets that have a significant part of their sales and operations in developing nations. These companies are thus subject to the regulatory and governance controls of their developed native country but can still enjoy and benefit from the growth of the emerging nations in which they operate.

An example of a company that is located in a developed country but has significant operations in emerging markets is the British telecommunications giant Vodafone plc (NASDAQ:VOD). Vodafone recently boosted its outlook due largely to strong growth in the emerging markets of India and Turkey. This emerging markets growth, combined with a strong showing in Germany, Britain, and the Netherlands was more than enough to offset weakness in the debt-ridden European periphery nations.

This also illustrates another advantage of a company having presence in both developed and developing nations: diversification. Weakness in one country or region can be offset by strong performance in another country or region. In Vodafone’s case, weakness in the European periphery was offset by strength in the European core and emerging markets.

Telecommunication companies can offer an extra benefit to investors in today’s world of budgetary and debt problems in developed nations. The cash flows of telecommunications companies are resistant to adverse effects caused by economic difficulties. This is because people and businesses are reluctant to give up their phones and internet connections; they prefer to first give up other luxuries should their incomes drop.

Telecommunications companies also tend to be favorites of dividend investors. This is because these firms often pay out relatively high percentages of their earnings in the form of dividends. This results in these stocks having higher yields than the common stocks of companies in many other industries. The companies are able to pay these large dividend distributions due to their large amounts of free cash flow. Combined with the growth that internationally diversified companies could see from their emerging markets operations, these could potentially be excellent dividend growth stocks as well.

Here are three more European telecommunications companies with a high dividend yield and significant operations in emerging markets.

TeliaSonera AB (OTCPK:TLSNF) (OTCPK:TLSNY) is headquartered in Stockholm, Sweden. The company offers fixed-line telephone and internet service and mobile voice, texting, and data plans to more than 160 million customers in Europe and Asia. TeliaSonera also operates the largest internet backbone in Europe and one of the largest backbones in the world.

TeliaSonera has operations in the Nordic and Baltic nations, Spain, Georgia, Turkey (through part-ownership of TurkCell (NYSE:TKC)), Russia, Nepal, Tajikistan, Kazakhstan, Uzbekistan, and Moldova, among others. Their operations thus span northern Europe and much of western and central Asia with a few operations scattered elsewhere. The company is the tenth-largest mobile network operator in the world.

A few weeks ago, TeliaSonera reported very good results from the latest quarter, despite the firm missing analyst estimates. The company has been growing its revenues, earnings, and customer base at an impressive pace and looks poised to continue. Not only does the company have strong growth potential from their operations in the emerging economies of Asia and Eastern Europe, TeliaSonera’s operations in the developed Nordic economies have also been experiencing growth. TeliaSonera’s dividend policy states that the company will pay out 30-50% of its net income to investors. This should result in a steadily rising dividend along with earnings. TeliaSonera trades with a trailing P/E of 9.61 and a trailing dividend yield of 5.14%. This dividend is subject to a 15% Swedish withholding tax for U.S. investors.

Telefonica S.A. (NYSE:TEF) is headquartered in Madrid, Spain. The company is one of the largest telecommunications companies in the world with operations primarily in Europe and Latin America. Telefonica also holds a 9.7% stake in the Chinese operator China Unicom.

Telefonica has been punished by the market due to the company’s association with Spain which is a member of the economically weak, debt-ridden P.I.I.G.S. Telefonica derives only a minority of its sales from Spain, however. Less than 30% of Telefonica’s revenue comes from Spain. The majority of both revenues and operating income come from Latin America and European markets outside of Spain. This should give the company some protection against further economic weakness in Spain, reinforcing my earlier point about the benefits of international diversity.

One potential risk with Telefonica is that the company has a negative free cash flow. If the company is unable to roll over its debt at maturity then it will need to either cut its CapEx spending or cut its dividend. There does not appear to be any immediate risk of this and the company may naturally begin to slow down its CapEx once its growth ultimately begins to slow. It is still something to be aware of when considering an investment in this company.

Telefonica trades with a trailing P/E of 4.9, a forward P/E of 8.14, and a trailing dividend yield of 11.00%. Management has committed (PDF file) to a forward dividend of 1.75 euro which would give the stock a forward dividend yield of 12.40%. This dividend is subject to a 19% Spanish withholding tax for the U.S. investors.

France Telecom (FTE) is headquartered in Paris, France. The company has operations in France, Spain, Russia, India, Vietnam, a number of countries in Africa, and a few other nations in Western, Central, and Eastern Europe. France Telecom is one of the largest fixed-line and mobile operators in world.

The Indian market could be a potentially valuable growth market for France Telecom. The company obtained a license to offer broadband services in 2009, likely to take advantage of the country’s low but rapidly growing broadband penetration. One potential risk here could be a worsening debt crisis in the Eurozone. Yields on French bonds have been rising and this may be due to the exposure that French banks have to Italy’s debt. If French banks need to start seeking bailouts or suffer massive losses then it could cause the French stock market to get sold off. This would cause the stock price of France Telecom to fall. I doubt that this would have any significant effect on France Telecom’s business operations though.

France Telecom trades with a trailing P/E of 10.95 and a forward P/E of 8.92. Management has guaranteed a dividend of 1.40 euro for the next two years which would give the stock a dividend yield of 11.00%. This dividend is subject to French withholding tax of 15% for U.S. investors.

All financial data comes from Yahoo Finance and Zack’s Investment Research except for data on TeliaSonera which comes directly from the company. They are believed to be correct at the time of publishing.

Disclosure: I am long TEF.