France Telecom: A 12.9% Dividend Opportunity

| About: Orange (ORAN)

France Telecom (FTE) is a telecommunications based in France and is the third largest company in Europe. It currently has over 190 million customers and in 2011 reported revenues in excess of €45 billion.

The projected yield of the dividend for the coming year is 12.9% and it has already declared a dividend payment for the 5th June 2012. Also, the stock is currently trading at $13.91 per share, while Morningstar rates its fair value at $28.00 per share. Morningstar recommends buying at anything under $19.60 per share, and selling at $37.80 per share. This seems like an opportunity that is too good to be true, so is it?

Can France Telecom keep the dividend yield high?

France Telecom recorded cash from operations of €12.879 billion in 2011. It already spends a large portion of its cash from operations on capital expenditures, €6.711 billion. Therefore, it had a free cash flow of €6.168 billion in free cash flow which it had free to spend on tackling debt levels and paying shareholders back in dividends. Its debt to equity ratio is just 1.1 compared to an industry average of 2.8. Consequently, it can easily tackle its debt while maintaining steady dividends to shareholders. It should record similar or improved numbers this year as the French economy continues to recover.

On top of this, over the last two years France Telecom has paid a similar dividend level so there is no reason to suspect that it cannot continue to maintain this dividend. This is supported by the fact that it declared a dividend on the 5th April 2012. They indicated that the dividend will be paid on the 5th June in the amount of $1.049200.

Will the share price rise?

The share price presents a compelling opportunity as well. In 2011, France Telecom reported falling revenues of €45.277 billion, down from €45.503 billion. This was a loss of just €226 million but in that time its shares fell 27.56% from $20.7 per share to $15 per share. It was also expanding while this was happening. During 2011, France Telecom spent €6.711 billion on capital expenditures. This is a good indicator of growth for the future as France Telecom continue to recover from the recession.

Furthermore, France Telecom is also very undervalued if measured against other companies in its industry. Its price/earnings (TTM) is just 7.2 compared to an industry average of 24.1. Similarly, its price/sales is 0.6 compared to an industry average of 1.1. Its operating margins are 17.6%, 6.4% higher than the industry average. Also, its net profit margin is 5.0% higher, at 8.6%. These figures show it is significantly more profitable than the average firm in its industry, while having a lower P/E ratio and a lower Price/Sales. All of this clearly suggests it is undervalued.

Other opportunities for astronomical dividends yields include stocks like Telefonica S.A. (NYSE:TEF), and Banco Santander (STD). Telefonica ability to pay its dividend, however, is questionable as it has a total debt to equity of 306.42 and is unlikely to have a healthy net income due to the Spanish crisis. Having said that, it is part of the much larger Telefonica Group and therefore will be supported by the larger company if necessary. Banco Santander is much better positioned to pay a dividend as the company has a total debt to equity of just 0.4 compared to an industry average of 3.6.

All my data is from Morningstar.com and Google Finance.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in FTE over the next 72 hours.