Oi's Dividend Policy Supports Portugal Telecom's 17% Yield

Apr.19.12 | About: Portugal Telecom (PT)

The Portuguese incumbent telecom company, Portugal Telecom (NYSE:PT), currently offers the best shareholder remuneration within the European telecom sector. PT's share price tumbled by more than 40% over the last year, increasing the dividend yield to its current 17%.

Regarding PT's dividend sustainability, see my previous analysis on "Portugal Telecom: Is the 16% Yield Sustainable?".

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Source: YahooFinance

PT relies on the domestic cash flow generation and dividends paid by foreign subsidiaries to cover its own dividend commitment.

PT has a direct shareholding of 15.5% in Brazilian company Oi S.A., that recently increased its dividend policy for the period 2012-2015 (fiscal years 2011-2014). The dividend policy approved consists of the payment of a 2 billion reais ($1.1bn) dividend for each year. This dividend is conditional upon a maximum net debt to EBITDA ratio of 3x for Oi. According to this dividend policy, PT will receive around €130m annually from its direct stake in Oi.


This dividend policy from Oi is positive for PT, and can dissipate some fears of a dividend cut. Next month PT will pay €0.435 to shareholders (ex-dividend date 22 May), after the interim dividend of €0.215 paid last December.

The shares are trading near all time lows and with an undemanding 8.7x forward P/E ratio. At current price levels, downside risk seems limited, unless a worst-case scenario of a Portuguese default materializes.

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