France Telecom's Dividend Cut Creates More Downside Risk For The Stock

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While investing in dividend-paying stocks has been a solid strategy for the past couple of years, it is also full of pitfalls. Many companies are facing global economic pressures, have a need to pay back debt, as well as increased competition which has led to some dividend cuts. When a company slashes the dividend payout, the impact can be tough for investors. In an extreme case where the dividend was eliminated completely, Supervalu, Inc. (NYSE:SVU) shares dropped from about $5, and in the weeks following, made new 52-week lows at less than $2. Some investors bought the dip as soon as the dividend cut was announced, but the shares continued to drift lower for at least a couple of weeks after the dividend was eliminated. Of course, there is a big difference in cutting the dividend and eliminating the dividend, however, the multi-day downward trend might be the same since it can take weeks for the market to fully digest and absorb a major change to the dividend policy.

That brings us to France Telecom (FTE) which is one of the latest companies to announced a major cut in the dividend payout. This leading telecommunications company in France reported earnings which declined and it also said that next year could be even tougher than 2012 has been. It also said it was planning to cut the dividend, from former levels of about $1.40 Euros per share to just .80 Euros annually. That is a major cut, and it could take many days for the full impact of this cut to be digested. That's why I think that in spite of a nearly 70 cent drop in the stock price, it is still too early to buy.

The other reason it is probably too early to buy is because France Telecom is facing increasingly heavy competition from low-cost mobile phone carriers such as Vivendi SA, Bouygues SA and Iliad. The competition from Iliad is particularly intense as it just started offering service in 2012. It has already penetrated 5.4% of the entire market, based on very low monthly plans for consumers. This is one reason why earnings at France Telecom could drop even further in 2013 and possibly cause the need for additional cuts in the dividend as France Telecom attempts to maintain its credit rating and pay down debt. This company has about $9.6 billion in cash and around $51.3 billion in debt, which is considerable and adds risks as revenues come under pressure.

France Telecom shares dropped to about $11 in June, and the stock appears headed back to that level. It could make sense to watch the shares closely if it reaches $11. This could be a key support level, however, if that does not hold, it is more likely to test $10 per share in the next couple of weeks as the reality of the dividend cut, debt levels, and reduced earnings in 2013, are more fully recognized by global investors.

Key Data Points For France Telecom From Yahoo Finance:
Current Price: $11.42
52-Week Range: $11.41 to $19.41
Dividend: about $1 annually
2012 Earnings Estimate: $1.80 per share
2013 Earnings Estimate: $1.69 per share

Data is sourced from Yahoo Finance. No guarantees or representations are made. Please consult a financial advisor before making investments.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.