Portugal Telecom: Q4 2011 Earnings Supports 16% Yield

| About: Portugal Telecom (PT)

Portugal Telecom (PT) released on 30th March its fourth quarter results, and confirmed the payment of a remaining dividend for 2011 fiscal year of €0.435 ($0.57), which together with the €0.215 ($0.28) interim dividend already paid make total dividend per share for 2011 of €0.65 ($0.86). The amount of €0.435 per share will be paid on 25 May 2012.

Taking into account this €0.65 DPS, PT offers a very attractive 16% dividend yield. In 2011, PT's dividend payout ratio is 167% based on €0.39 ($0.52) earnings per share breaking last years average payout of 76% (see my previous article analyzing PT's dividend sustainability here). PT's shares are trading near its 52 week low, which probably means that most of headwinds that PT faces in Portugal regarding the country weak macroeconomic environment are already priced in.

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Source: YahooFinance.

In the last quarter, more than half of revenues were generated abroad but the resilient domestic business with higher margins take a higher weight of profitability. Revenues increased 64% in 2011, with the proportional consolidation of Brazilian companies Oi and Contax as from 1 April 2011. Excluding this effect, revenues declined -0.2% in 2011.

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Source: PT.

In Q4 2011, PT's net income fell to €37.6 million ($49.6million) from €54.5 million a year earlier mainly due to weak performance at Oi, which reported a 19% fall in EBITDA and 4.7% fall in revenues. The focus of concern is in Mobile which only had 1.6% revenues growth in 4Q, highlighting Oi's relatively weak position in the Brazilian Mobile Market. Margins were also hit by Oi beginning a commercial offensive aimed at improving its positioning in the Mobile market.

Although domestic revenues were down 6.7% in Q4 2011, PT continues to add costumers to all its product offerings. The most impressive is pay-tv, with a 25% customers increase over 2011. Overall, PT's customers increased 9.2% in 2011 to more than 93 million.

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Source: PT.

In terms of domestic business financials, EBITDA margin remained stable at 43.5% (43.2% in Q4 2010) a resilient performance due to strong cost cutting efforts. Operating costs declined by more than 7%. Additionally, to preserve cash PT's capital expenditures (capex) decreased 3% in the quarter, and the company intends to cut domestic capex at a double-digit rate on 2012.

PT reported at the end of 2011 net debt of €6.6bn ($8.7bn) increasing the leverage to almost 3x EBITDA. Although this is a high level compared to €3.7bn ($4.9bn) of total shareholder's equity, PT's operating cash flow was higher than €1bn ($1.32bn) well above the €260m ($343m) of interest payments. After the loans received last year, a €600m bond and a €1.2bn credit facility, PT has its debt maturities fully financed until the end of 2013 and the financial flexibility to continue to honor its dividend commitments.


Although these results are slightly weak, the resilient domestic business and the company commitment to high shareholder remuneration provide a good support to the dividend payment. PT's cash generation remains good and with debt maturities covered until end of 2013, at least for the next two years, there is low probability of a dividend cut.

PT's shares trade with a cheap forward P/E of 8x, and are also supported by the very high 16% yield. For a share price rebound it is necessary a better economic environment in Portugal and better operating trends in Brazil but with much of the negative outlook already priced in, the downside risk appears limited.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.