Telefonica Brasil (VIV) is a telecommunications company based in Sao Paulo, Brazil. It offers mobile services throughout Brazil and it is part of the larger Telefonica network. Its competitors include America Movil (AMX) and Oi SA (OIBR).
Why buy Telefonica Brasil?
- Telefonica Brasil's share price is severely undervalued at $22.40. Its fair value is almost certainly over a third higher than this or more. Its P/E ratio is currently 9.1 versus an industry average of 31.8. This is also a good indicator that the stock is undervalued.
- The company has a very low debt to equity of just 0.1 and high free cash flows of BRL 3.488 billion. It also spent BRL 4.654 billion in capital expenditures last year showing the company's desire to take advantage of the rapidly growing telecommunications market in Brazil. Indeed, the company has grown sales by an average of 22.3% over the last three years while maintaining a high net margin of 14.6%, these figures are impressive to say the least.
- Telefonica Brasil's ROE TTM is 17.9% versus an industry average of 6.9%. Therefore, stockholders in the company will likely see better than market returns in the future.
- The company also offers a very attractive dividend with a projected annual yield of 4.61%. It pays its dividends semi-annually while occasionally adding in a special cash dividend if its financial position is healthy. Over the last year it has paid out two special cash dividends along with its regular dividends. The last dividend it paid was on the 12th of April and was in the amount of BRL 0.5162.
- Telecommunications are exploding in Brazil and many people there consider mobile phones to be a necessity rather than a luxury good. Consequently, even if there is a slowdown in the overall economic growth rate in Brazil the telecommunications business will still be booming. The amount of phones sold this year is meant to be 50% higher than in the fiscal year of 2011 so it is clear where the industry is headed.
I would recommend this company for dividend and growth investors who want to take advantage of the rapid growth in emerging markets. Telefonica Brasil has a solid free cash flow and very low debt allowing it to maintain its dividend levels while maintaining spending on CapEx to keep ahead of its competitors technologically. It is well positioned in the market and has strong economies of scale globally due to the fact it is part of the global Telefonica group.
Disclosure: I am long VIV.