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France Telecom (FTE) is a telecommunications firm based in France and is the third-largest company in Europe. It currently has over 190 million customers, and in the first quarter of 2012 it took in €10.922 billion in revenues, of which less then 50% was from France. Africa and the Middle East are becoming increasingly important for France Telecom, with 10.2 million net additional customers in the first quarter, up to 76 million customers from 65.5 million in the previous quarter.

Key Statistics

The projected yield of the dividend for the coming year is 13.97% and its ex-dividend date is June 5, 2012; the dividend will be paid exactly a month later. Also, the stock is currently trading at $12.80 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.

Can France Telecom Sustain the Current Yield?

France Telecom recorded operating cash flows of €2.335 billion compared to €2.635 billion in the first quarter of 2011. While this decrease is not ideal, it must be remembered that in the time since the first-quarter 2011 results were published and now, the share price has dropped more than 30%. Capital expenditures were up €24 million, at €1.097 billion, which is encouraging because it shows France Telecom's commitment to expand and also replace out-of-date equipment. Therefore, it had a free cash flow of €1.262 billion, which it can spend on tackling debt levels and paying shareholders back in dividends. Its debt-to-equity ratio is just 1.1, compared to the industry average of 2.8. Consequently, it can easily tackle its debt while maintaining steady dividends for shareholders. It should record similar or improved numbers over the rest of the year as the French economy continues to recover. While France Telecom has stated that it will cut its dividend, its first dividend has not been substantially cut and that is why the projected yield is 13.97% -- only down 0.61% on what last year's dividends would have suggested it would be.

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 April 5, 2012, similar to what was paid in the past year. The company indicated that the dividend will be paid on July 5, 2012, in the amount of $1.049200.

Will the Share Price Rise?

France Telecom has lost more than 39.5% of its value since the start of last year. Its first-quarter revenue for 2012 was just 1.8% lower than its first-quarter revenue for 2011 when using a comparable basis model. If you use a historical basis model, this figure drops to 2.7% lower. Nevertheless, the share price drop has been very disproportionate if you use either figure regarding change in revenue.

In the first quarter, France Telecom spent €1.097 billion on capital expenditures. This suggests the company is taking advantage of the rapid growth in the emerging economies in Africa and in other countries. It already has a commanding presence in many African countries through its subsidiary, Orange, and it will continue to benefit from these markets. These are good indicators for growth for the future as France Telecom continues to recover from the recession. Its Latin American branch has experienced growth as well since 2011.

As discussed in my previous article on France Telecom, the company is also very undervalued if measured against other companies in its industry. Its price/earnings is just 6.94 compared to an industry average of 24.1. Similarly, its price/sales is 0.59 compared to an industry average of 1.1. Its operating margins are 17.55%, 6.4% higher than the industry average. Its net profit margin is 8.45%, which is also higher than the industry average. 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.

On the political front, Francois Hollande's recent election was a shock and he is seen to be much less pro-private business than Nicholas Sarkozy. However, he has made some very encouraging first steps in his presidency by opening a clear dialogue with Angela Merkel and positioning himself as a pro-growth president. Therefore, the skepticism, at least so far, seems to have been unfounded. This is likely to benefit French companies, such as France Telecom, whose stock prices have fallen on fear of a Hollande presidency. However, only time will tell what sort of president he will truly be. Nonetheless, the first signs are encouraging to say the least.

Withhold Tax

The current withhold on dividends in France is 15%. Hollande might seek to raise this over the next year to 25%. However, even 25% off the dividend presents a golden opportunity for large returns in a safe company.

Conclusion

Unless something surprising happens to France Telecom, it will continue to offer the dividend yield it is offering now. Therefore, buy France Telecom for the sustainable dividend but also because it is undervalued. Its expansion and growth in rapidly growing markets indicate that it will continue to grow and record solid profits and revenues. It is the third-largest telecom company in Europe and one of the largest in Africa. If one thing is certain, telecom companies will continue to see constant demand for their products and they are undoubtedly a safe haven for investors right now. Over the short term, one might make a loss. However, over the long term, a profit is very probable. It is a high-risk investment, but it is also an investment that offers the possibility of very high returns.

Telefonica S.A. (TEF), Telefonica Brasil (VIV), Portugal Telecom (PT), Banco Bilbao (BBVA), and Banco Santander (STD) are some other companies that offer very high dividend yields. The first three names are also high-risk investments, whereas the other two I would place in the medium-risk category. All of these have a lot of potential over the long run.

Data is sourced from Google, 4-traders.com, and Morningstar.

Source: France Telecom: Post-Earnings, Can It Still Pay A 13.97% Dividend?