There is no denying: Spain dominates the news. Even though it would make more sense to direct attention to Italy, Japan or the U.S. in terms of debt loads and budget deficits, investors chose to pick on Spain. I acknowledge there are fundamental problems in Spain, but I do not believe in fear-directed investing. In fact, I believe the issues in Spain will be resolved over the next year and investor anxiety will eventually evaporate. I am sticking with my thesis on Telefonica (TEF) in particular, although I consider the probability of a dividend cut higher than before.
Buying stocks, when headlines suggest otherwise, requires some nerves. As I have outlined in my other articles about TEF, I am particularly attracted to its strong emerging market footprint in Latin America. Since the stock price has just rebounded a little bit from its 1 year lower trend canal, I continue to add to my existing TEF position with the intention to hold on to the stock for years to come.
Now, TEF is not without risk, especially in the current market environment. I do, however, believe in its potential as a defensive company to navigate the uncertainties ahead.
TEF is a Spanish telecommunications company domiciled in Spain with significant operations in Latin America, particularly Brazil, Mexico, and Argentina. I like about the stock that the company produces huge amounts of cashflow in these markets, which reduces TEF's dependency on its more saturated Spanish home market. I do not believe, however, that the Spanish issues will have a serious impact on the company and its revenue generating capability. Revenue has been fairly stable over the last three years. Non-cyclical companies should do fairly well over the course of a recession.
I still consider TEF's debt load a little troublesome since it is to be expected that increased balance sheet scrutiny will cause a shift from shareholder remuneration to debtholder appeasement. I assume that this shift will start soon resulting in a restructuring of balance sheets through increasing equity capital.
Nonetheless, the positioning of the company in high-growth emerging markets is very attractive in my opinion and the company is still attractively priced: The forward P/E stands at only 6.3x. Investors still catch a double-digit dividend yield (about 13% at the moment consisting of cash and share repurchases). The fact that Spain and Spanish stocks in general are shunned at the moment, makes this company even more attractive for contrarian investors.
Disclosure: I am long TEF.