France Telecom's 12% Dividend: Secure Through 2013

May. 1.12 | About: Orange (ORAN)

While reviewing a list of high-yield, international stocks, I noticed that the reported dividend yield for France Telecom (FTE) had jumped to somewhere in the 13.5% to 15% range - depending on the financial website - up from a yield below 11% the last time I looked at the stock. This yield jumps appears to be a good time to take a closer look at France Telecom and its double-digit dividend yield.

First, here is the current accurate dividend yield information on France Telecom: The company pays distributions twice a year - an interim dividend in September and a final dividend for the fiscal year in June. For the past several years the two distributions have total €1.40. The current share price on the Paris exchange is €10.34, giving the stock a 13.5% yield. Converting both the dividend and share price to dollars should produce a similar yield number. The 2011 final, recommended dividend of €0.80 to be paid in June must be approved at the annual general meeting of shareholders to be held on June 5. If approved the dividend will be paid on June 13.

The €1.40 - currently $1.85 per ADS - annual dividend has been in effect since 2008. For 2012, the company is changing the dividend policy to pay out 40% to 45% of operating cash flow - defined as EBITDA minus Capex - as dividends. The new policy was probably instituted in the face of declining operating cash flow expected for this year. In 2011, the company generated cash flow of €9.3 billion, which was down very slightly from 2010. For 2012, the company's guidance is cash flow of about €8 billion, a drop of 15%. The 2011 annual report gives the following reason for the decline:

In an environment already marked this year by a deterioration in macro-economic indicators, the expectation of increasingly stringent regulations, a higher tax burden, and more intense competitive pressures, particularly in France, with the arrival of the fourth mobile operator in January 2012, the Group has set a target for operational cash flow (restated EBITDA less CAPEX) of close to 8 billion euros.

After digging into the financial pages, it was determined the €1.40 dividend paid to shareholders was 40% of the 2011 operating cash flow. If the company is accurate with the 2012 projection of €8 billion of cash flow, the total dividend for the year will be between €$1.20 and €1.35. The high end of the range is not a large drop from the current dividend rate and it is possible if 2012 results come in just a little better than the current expectations, the dividend rate will be maintained for at least one more year. For the worst case the 2012 interim and final dividend equal a 11.5% dividend based on the current share price.

France Telecom is the major telecom player in France and a growing presence in Spain. The tax and regulatory environments in these countries have been detrimental to growth of profits. The company's growth prospects rest with existing and new operations in eastern Europe, a large portion of Africa and countries in the Middle East such as Iraq. According to the company's Conquests 2015 business plan, 2012 is supposed to be the low point for operating cash flow as the company puts into motion plans for growth out to the year 2015 and beyond.

At the current share price, investors are being paid a 12% or so dividend to see if the company can work its plan and reverse the trend in cash flow. Investors interested in the double-digit dividend yield should wait until after the May 6 election in France before making a decision to pick up shares. A socialist win could easily drive down the share price to near the recent low below $13 for the U.S. traded ADS. This would be a speculative investment hinged on management success with a dividend kicker.

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