2 Telecom Dividend Gems With Growth Potential

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 |  Includes: BT, CHL, ORAN, TEF, TLK, VOD
by: Bidness Etc

As the wireless penetration rate in the U.S. rises (currently over 100%), growth opportunities for various local telecom carriers are drying up, which is reflected in their financials. In such a scenario, telecom companies in Indonesia, China, Brazil and Spain are expected to provide growth in the wireless sector. Moreover, their stocks are very attractive from a dividend standpoint. Most of them are high dividend stocks and have shown impressive growth in their dividend payouts. In this article, we have identified two companies that are operationally strong and have the cash generation ability to sustain their dividend payouts.

PT Telekomunikasi Indonesia Tbk (NYSE:TLK)

TLK offers voice, internet and data services to its customers in Indonesia. The Indonesian government is the majority shareholder of the company, and its shares are also traded on the New York Stock Exchange. TLK is a $19 billion-worth company and its shares are currently trading around their 52-week high. The company mainly operates through its cellular, fixed line and internet segments; all segments have shown decent growth over the last few years. Revenues have been on a consistent incline since FY2007 and have grown at a modest four-year CAGR of almost 3.5%. The company has consistently grown its customer base over the years, and as of the financial year that ended 2011, it had a total of almost 130 million customers, with its cellular subscription base growing by 14% compared to the previous year.

Even though the country s mobile penetration has surged over the years, it is still moderate compared to the U.S. and Singapore. This provides great growth opportunity for the company to further increase its customer base. The stock offers an attractive dividend yield of 3.6% and a modest payout ratio of 43%, which would allow dividend growth going forward. Its dividend growth, over the years, can be seen in the chart. The company currently pays a dividend of $1.595 per share, which is an improvement of almost 16% from the previous year. In the financial year ended 2011, TLK paid cash dividends of almost $650 million, made debt payments of $460 million and generated cash flows from its operations of over $3 billion. TLK has a modest debt-to-equity ratio of 32%. Its free cash flow yield of 6% is also impressive compared to its current dividend yield of 3.6%. Moreover, its operating cash flows are on a continuous incline, and have grown at a compounded rate of almost 8% over the last four years, which indicates the company's ability to sustain its dividend payments in the future. The table below compares the company's 1Q2012 results to the same quarter of the previous year.

Click to enlarge

BT Group plc (NYSE:BT)

BT provides telecom and data services to its customers, and has operations in over 160 countries worldwide. The business operates through two business segments, traditional business lines and new wave business lines, which include various broadband and network services. It is a $27 billion company, and its shares are currently trading at $34.7, close to their 52-week highs. Broadband penetration in the U.K. has been rising on a yearly basis because of increased usage of internet in the region. The broadband market continues to drive growth for the company, whose stock offers a very attractive dividend yield of 3.5% for investors, and has a modest payout ratio of 30%.

The company has historically posted high gross and net margins, and the figures have seen some recent expansion. In the financial year that ended 2011, BT posted gross margins of 85%, higher than its peer Vodafone's (NASDAQ:VOD) 32%. Currently, its margins are higher than Vodafone's 32% and Deutsche Telekom AG's (OTCQX:DTEGY) 42%. Since FY2009, after incurring a loss, its earnings have been on a consistent upward trend, and they are expected to grow by 6% over the next five years. Its quarterly earnings growth has been equally impressive at almost 34% YoY.

In the financial year that ended 2012, the company paid total dividends of 590 million pounds, while it generated cash flows from operations of 3.6 billion pounds and free cash flows of 2.5 billion pounds. BT's free cash flow yield of 9.3% towers over its current dividend yield of 3.5%, indicating its operational strength as well as its ability to sustain its dividend payments. A modest payout would also allow for dividend growth in the future, and proposed dividends for FY2012 have already gone up by almost 12% from the previous year's 7.4 pence per share.

In previous reports, we analyzed the operations of Telefonica (NYSE:TEF), France Telecom (FTE) and China Mobile (NYSE:CHL), and reached a conclusion that the aforementioned global telecom players have tremendous growth potential, especially in emerging markets, where broadband and mobile usage is surging. For a detailed analysis on the other players, click on the following names; Telefonica (TEF), France Telecom (FTE) and China Mobile (CHL).

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