Seeking Alpha
Deep value, special situations, contrarian, long only
Profile| Send Message|
( followers)  

In my article of September 13, 2011 5 Telecom Companies That Offer An Attractive Dividend I discussed 5 companies that offered attractive dividend yields. Much has happened since then. European telecom companies in particular are facing a challenging environment and many companies have reduced dividend payments.

In this article I will focus on European telecom stocks. Cash flows in the sector are relatively high, enabling telecom operators to distribute the most in the form of dividends. The current difficult operational conditions has lead to an unpopular measure: cuts in dividends.

Despite the difficult operational environment, telecom companies still offer high dividends because they want to compensate investors for low or stagnating growth compared to other industries.

Company Currency Price 52-Week High 52-Week Low YTD(%) DivYield
FRANCE TELECOM EUR 11.69 16.2 11.1 -4.4 12.3
TELEFONICA EUR 12.8 18.5 11.9 -1.5 10
VODAFONE GROUP GBp 172.1 185 154 -3 8.1

Vodafone (VOD)

Fiscal Q3 (December 31) organic revenues grew 1.6% year-over-year to GBP 11.62 bln, slightly ahead of consensus. Organic service revenues increased 0.9% (consensus +1.1%). During Q3, Vodafone won 7.42 million customers lifting the total base to 439.6 million. As usual, profit figures were not disclosed.

FY Q3 developments:

  • Organic service revenues: Europe -1.7%, Africa, Middle East and Asia Pacific +7.6%. Country development: Spain -8.8%, Italy -4.9%. India (+20%), Turkey (+24%), South Africa (+8.0%) and US-based Verizon Wireless (VZ) (+6.8%)
  • Free cash flow +35% to GBP 1.47 bln primarily due to the timing of tax payments
  • Data revenue +21%, smartphone penetration reached 24% in Europe


Vodafone still expects adjusted operating profit guidance of GBP 11.4 -11.8 bln (consensus GBP 11.6 bln). Free cash flow is still anticipated in the range of GBP 6.0 to 6.5 bln.

Conclusion

Q3 service revenues were a touch below consensus. Regionally, Italy and the UK performed weaker than expected, while Germany and Spain slightly improved. Growth accelerated in India and South Africa and remained strong in the US. Guidance was confirmed as expected.

Weakening macro trends in Europe (64% of the Vodafone's revenues) could increasingly hurt Vodafone's business. But the company is benefiting from a broad regional diversification with strong growth in emerging markets which helps to offset weakness in mature markets. Furthermore, Vodafone should benefit from ongoing mobile broadband/data growth.

Prospects have recently improved in India (positive tax ruling, license cancellations of peers), and thus an IPO of the Indian unit could take place this year. This could reveal the value of the unit.

Telefonica (TEF)

Telefonica's 2011 revenues rose 3.5% year-over year to EUR 62.84 bln, EBITDA fell 22% to EUR 20.21 bln. Adjusted EBITDA fell 2.1% with adj. EBITDA margin at 36.1% (-220 bps). Net profit declined 47% to EUR 5.40 bln mainly burdened by provisions for headcount reductions (EUR 1.87 bln) and as a revaluation of its stake in Vivo (EUR 3.5 bln) benefited last year's period. Adjusted net profit was down 17%.

In Q4, revenue -1.8% to EUR 16.16 bln, 1% ahead of consensus. EBITDA gained 10.6% to EUR 5.96 bln and benefited from asset sales but was 2-4% below estimates on an adjusted basis.

Regional development in organic terms in 2011:

  • Spain (25% of group EBITDA): Revenue -7.6%, EBITDA -11.6%
  • Latin America (54%): Revenue +5.0%, EBITDA -1.4%
  • Europe (21%): Revenue -1.3%, EBITDA +3.8%

Outlook 2012

On constant currency, TEF expects revenues growth "above 1%", a lower EBITDA margin decline than in 2011. Net debt/EBITDA should be 2.35x (2011: 2.46x). Shareholder remuneration will amount to EUR 1.50 per share, including the payment of a cash dividend of EUR 1.30 and a share buyback for the remaining amount. Capex/Sales ratio is seen stable.

Conclusion

Telefonica reported relatively mixed Q4 results with top-line a touch ahead of consensus, while EBITDA was below consensus. Regional revenue/EBITDA performance was also very streaky. Mixed in Latin America, better than expected in Germany, while trends in Spain and the UK deteriorated and missed estimates.

Concerning the outlook, EBITDA guidance for 2012 looks somewhat vague. Margin pressure should be lower than in 2011 (<200 BPS), but this leaves room for disappointments as consensus is only expecting a 50-100 bps margin decline. The lowered dividend target (announced last December) has been confirmed. Although the short-term outlook is muted driven by weakness in Spain, medium-term prospects remain favorable.

Latin America will be a growth driver and Europe (ex Spain) is performing relatively solidly. Telefonica reduced dependence on Spain but the domestic market will likely be the swing factor for the stock. The timing for bottoming/stabilization is difficult to predict but massive job cuts help to cope with the challenging domestic environment.

France Telecom (FTE)

Q4 revenues on a comparable basis fell 1.7% year-over-year to EUR 11.43 bln. EBITDA on a comparable basis declined 2.8% to EUR 3.47 bln but beat consensus by 3%. EBITDA margin was slightly down to 30.4%. Excluding regulatory burdens, revenue decreased 0.2%, EBITDA was down 1.2%.

In 2011, revenues on comparable basis fell 1.6% to EUR 45.28 bln, adj. EBITDA declined 4.8% to EUR 15.08 bln. Excluding regulatory burdens, revenue was stable, and EBITDA was down 3.4%. EBITDA margin declined 110 basis points to 33.3%. Dividend per share should remain stable at EUR 1.40.

Outlook 2012

Due to the weakening macro conditions and intense competition, France Telecom expects operating free cash flow to come in 'close to EUR 8 bln' (consensus EUR 8.2 bln, 2011: EUR 9.3 bln). Net debt/EBITDA ratio is targeted at around 2x in the medium-term. Dividend per share should be 40-45% of operational cash flow. An unchanged interim dividend of 60 cents should be paid in September 2012. Furthermore, the company said it will not buy back shares this year, but may do so at a later stage.

Conclusion

Q4 results were relatively solid with EBITDA slightly ahead of consensus. This helped France Telecom to almost achieve its 2011 targets, e.g. limit EBITDA margin erosion to 100 bps. The cash flow target was even exceeded.

The outlook for 2012 was mixed. Guidance for operational cash flow was broadly in line with market expectations but France Telecom changed its dividend forecast. The dividend policy was changed and equates to a dividend per share range of EUR 1.21-1.35, lower than the previous commitment of EUR 1.40. Analysts had only expected a cut for 2013, but the intensifying mobile competition in France caused the company to react.

Final Conclusion On European Telecoms

The difficult home markets has lead to dividend cuts at major European telecom companies. If cash flow deteriorates further the coming year's dividends could be lowered once again.

Sentiment towards telecom companies has been negative this year. All three companies underperformed the broader market with a negative performance. Despite the difficult (domestic) environment, all three companies can profit from emerging markets. Better than expected domestic operational performance could act as a trigger for all three stocks. For dividend seekers, the three telecom companies mentioned in this article are top of the bill.

Source: 3 High Yield European Telecoms To Consider