In this report, we have picked out various global telecom companies, post their earnings releases, and analyzed how they compare with U.S. telecom companies like AT&T (T) and Verizon (VZ). We believe that T and VZ are trading at high valuations compared with global telecoms like France Telecom (FTE), Telecom Italia (TI) and China Mobile (CHL), and have limited upside potential, despite having strong business models and posting strong quarterly results. They are also experiencing a contraction in gross and operating margins, which are expected to further erode as they pay out more in smartphone subsidies. Moreover, the substantially lower dividend payout ratios of global telecoms should allow for further dividend growth, making them particularly attractive from an income standpoint as well.
France Telecom , one of the leading telecommunications companies, provides mobile, internet and telephone services to its customers both in France and across the globe. With operations in almost 33 countries, the company serves approximately 225 million customers, with 166 million customers utilizing its mobile services and 15 million availing the company's broadband internet services.
The company announced its latest quarterly results on July 26, reporting a decline of 2% in its revenue. This comes as no surprise, as intense competition from Lliad is putting FTE's revenue stream under immense pressure. Under Lliad's free mobile service, it charges 20 Euros for a plan that covers unlimited texts, messages and calls, as well as free calls to almost 50 countries. This is way cheaper than what FTE is offering for almost 50 Euros. In this context, the 2% revenue decline in France, the company's major revenue contributor, doesn't seem too significant. Moreover, there were some positives to come out in France, despite the seemingly obvious deterioration in revenue. The company lost 155,000 mobile customers in the second quarter of the year, which is a significant improvement from Q22011 when the company lost 615,000 customers. Spain also showed growth for the company, despite the recession that the country hasn't been able to get out of yet. In Spain, revenue jumped over 2%, and excluding the impact of regulatory measures, it improved by almost 5% in the first half, with growth seen in average revenue per users (ARPU) due to an increase in DSL subscribers, as well as an improvement in VoIP. The rest of the world, which includes emerging economies like Africa and the Middle East, showed growth as well, with revenue rising by almost 2% in the first half of 2012. On a quarterly basis, there was some growth that was visible as well, from countries like Armenia and Dominican Republic, in terms of increased revenue and growth in customer base.
FTE's stock currently offers a dividend yield of 12.2%, which has dropped slightly due to the strength in share price. In the financial year ended 2011, FTE paid dividends of approximately 3.7 billion euros, while generating operating cash flows of 12.9 billion euros, which indicates the company's ability to sustain its dividend payout. This roughly translates to an operating cash flow yield of 42%, well over its dividend yield. FTE is currently trading at cheap valuations, reflected in its P/E multiple of 8x, which is at a discount to its industry, as well as the five-year historic average. Since our last report on the company, the stock has gained almost 15% in value, and we believe the stock still has an upside potential based on growth in Spain, emerging markets and the stabilizing France. Moreover, the dividend yield is also very attractive from an income perspective.
For a detailed analysis on FTE, click here.
Telecom Italia , a telecom company, provides landline, mobile and internet services to its customers in Italy, Brazil and Argentina, with the majority of its revenue coming domestically from Italy. TI has a market capitalization of $17.1 billion, and the stock is trading 33% off its 52-week high of $13.6. The company has done well in terms of consistent revenue growth, even in times of economic meltdown in the countries it operates in. This growth in revenue is particularly impressive as it comes despite the slide in revenue from its domestic operations, which contribute a major chunk (60%) to the company's revenue stream. TI's diversification across geographies has helped the company in offsetting the slowdown in revenue from Italy. According to the latest results announced by the company on August 2, 2012, Brazil and Argentina both showed growth in revenue, with improvements seen in average revenue per user (ARPU) and total number of lines for both countries. After posting losses in the financial year ended 2011 due to impairment losses, the company is on track to post profits, as its second-quarter earnings jumped almost 6% from the first quarter of the current year.
The stock offers an attractive dividend yield of almost 6%, which is well backed by the company's operating cash flows. In the six months ended June 2012, TI incurred a total of 3.2 billion euros in capital expenditures and dividend payments, while generating operating cash flows of 3.9 billion euros, which signals the company's ability to finance its dividends and capital expenditures through operating cash flows.
TI's shares are currently trading at cheap valuations, and we believe there is price appreciation potential based on its exposure to growth markets and impressive revenue growth. TI is trading at 5 times its forward earnings, which is at a discount of almost 30% to Telefonica (TEF)'s forward P/E and a discount of 45% to FTE's forward P/E.
For a detailed analysis on TI, click here.
China Mobile , the world's biggest telecom company in terms of subscribers, provides voice and data services to its customers. As of the quarter ended June, 2012, the company had a total of approximately 683 million customers, up 11% from the first half of 2011. CHL has a market capitalization of $217 billion, and its shares are currently trading at $54 on the NYSE.
CHL derives its revenue from voice and data services, with the majority coming from voice. The company posted its latest results on August 16, posting revenue of CNY267 billion with a growth of 6.6% from the first half of FY2011. Despite a slight deterioration in EBITDA, net earnings also improved by 1.5%. These numbers are impressive considering the increase in the mobile penetration rate in China, and intense competition from peers like China Unicom and China Telecom Corp. According to the Chinese IT Ministry, China's mobile phone penetration rate is expected to cross 100% by 2015, which leaves less room for growth for the company. Key business metrics for CHL have also shown an improvement in the first half of 2012, with a continued expansion in the customer base. In the first half, CHL added almost 34 million customers, and the company is on track to post customer addition growth for another year in 2012. Voice and data usage both increased, resulting in revenue growth for the company.
CHL currently offers a dividend yield of 4.1%, which is well supported by its operating cash flow yield of 16%. In 2011, CHL made dividend payments of approximately $8 billion, while generating operating cash flows of $36 billion, which indicates the company's ability to consistently increase its dividend payments much like it has done in the past. The stock is trading at 11 times its earnings, at a discount to industry P/E of 16x and to its 5-year historic average of 28x. Moreover, CHL's EV/EBITDA of 4x is also slightly lower than its peers China Unicom Limited [(CHU) 5x] and China Telecom Corp. [(CHA) 4.1x]. Based on the depressed multiples given above, consistent revenue growth and consistently high gross margins, we are bullish on the stock.
For a detailed analysis on CHL, click here.
Verizon Communications Inc. is a provider of data, voice and internet services to customers in the U.S. It is a $122 billion-worth company and its shares are currently trading at $42.6 on the NYSE. The company hasn't been able to provide any substantial growth in revenue over the past years, which has also led to the consistent contraction in its gross margins, with contraction also visible in its operating margins. Moreover, Verizon's wireline business continues to slip further in terms of revenue, which was down 3% in the quarter recently ended. The company's payout ratio is also very high (200%) when compared with other global telecom companies, and even though its operating cash flows are sufficient to cover its dividend payments, we believe the high payout is not sustainable going forward. VZ is currently trading at 15 times its forward earnings.
Another telecom company that has shown a very modest growth in revenue is AT&T . Since the financial year ended 2007, the company has only been able to grow its revenue at 1.6%, much lower than Verizon. However, like Verizon, AT&T is also experiencing a contraction in both gross and operating margins for the last few years, which is a cause for concern. Moreover, going forward, margins are expected to decline further with the launch of the iPhone 5 in the fall. AT&T also has a very high payout ratio of 230%, while its dividend yield has constantly dropped since FY2010. T currently offers a dividend yield of 4.7%, which despite the downward trend, is still higher than its free cash flow yield of 2.6%; bringing the sustainability of its dividend payout into question. The stock is trading at 14 times its forward earnings.