Orange Now Yields Just 4.35%: I Am Waiting For The Africa/Middle Eastern Division Spinoff
- Orange slashed its final dividend by 50% to just 20 cents per share. The full year dividend is now 0.50 EUR per share.
- That's a disappointment, and Orange will probably lose some of its income-focused investors.
- The dividend yield of 4.35% is now 'fine', but I think the future SpinCo owning the African and Middle Eastern assets could be more interesting than the parent company.
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Orange (NYSE:ORAN) is one of France’s largest telecom companies and has large stakes in subsidiaries abroad, including Orange Belgium (TICKER) in Belgium as well as stakes in several subsidiaries operating in Africa and the Middle East. Orange was planning to spin off those African and Middle East assets into a new company, but COVID-19 has delayed those plans.
Orange has a relatively liquid US listing, but as the company reports its financial results in Euro, I will use the Euro throughout this article. Where applicable, I will also refer to the company’s European listing as Orange’s primary listing is on Euronext Paris where the telecom operator is trading with ORA as its ticker symbol. The average daily volume in France is in excess of 10 million shares.
Looking back at FY 2019, 2020 was supposed to be a go
2019 was a good year for Orange with an increased revenue (up 2%) an higher net income (up 50%) resulting in an EPS of 1.03 EUR per share on the back of a higher revenue combined with lower operating expenses. As you can see on the image below, Orange saved money on lowering the external purchases and labor expenses in 2019.
Source: financial statements
While boosting the net income by a double-digit percentage is nice, I also looked at the company’s cash flow statements. It’s easy enough to make an income statement say what the CFO wants it to say, but the cash flow statements indicate how much cash is flowing into and away from the business.
Orange reported an operating cash flow of 10.16B EUR but this included 950M EUR invested in the working capital position. Additionally, the total amount of taxes paid (1.08B EUR) was lower than the taxes that were due over FY 2019 (1.45B EUR). Adjusting the operating cash flow for these two elements as well as the 1.4B EUR in lease payments and 240M EUR payments to non-controlling interests, and the fully adjusted operating cash flow was approximately 9.1B EUR.
Source: financial statements
With an economic capex of 7.3B EUR, the adjusted free cash flow in FY 2019 was approximately 1.8B EUR. That’s lower than the 2.3B EUR Orange mentioned in its FY 2019 presentation but I have used a more conservative approach and included the payment to non-controlling interests as well as the interest payments on leases in my cash flow calculation.
Orange’s Q1 looks decent, unfortunately the company doesn’t release detailed financials
Unfortunately Orange only publishes detailed financial results every semester and no detailed cash flow statement was published as part of the company’s Q1 results. The summarized result appears to be encouraging with a 1% increase in the total revenue to 10.4B EUR while the EBITDAaL (EBITDA after Leases) increased by 0.5%. Due to COVID-19, the capex level decreased but this merely points towards delayed capex and not to a substantial reduction in the investment levels.
Source: press release
It’s interesting to see how the mature markets were in decline but the Africa and Middle East zones showed strong growth numbers with a 9% revenue increase in the retail segment.
Source: company presentation
Investors were also looking for Orange to execute on two other matters in 2020. Back in Q4 2019, Orange was planning to monetize certain cell towers to fund its 5G rollout plan, but COVID-19 has delayed those plans. Additionally, Orange was relatively advanced in its plans to spin off the African and Middle Eastern business in a separate entity, which would be trading in Paris and/or London. BNP Paribas and Morgan Stanley (MS) were appointed as advisors, but those plans were delayed as well due to COVID-19 and the rapidly deteriorating market circumstances.
And COVID-19 impacted Orange in a third way. Whereas Orange initially planned to pay out a 70 eurocent dividend (0.30 EUR had already been paid as an interim-dividend, and Orange initially proposed to pay a final dividend of 0.40 EUR per share), the full-year 2019 dividend was reduced to just 0.50 EUR which means Orange paid a final dividend of just 20 cents per share.
Source: annual report 2019
One of the main questions on everyone’s mind is whether Orange will restart paying the 70 cents per share it originally anticipated in the next few years, or whether shareholders will have to get used to yet another dividend reduction to 50 cents per share. Based on the recent closing price of 11.48 EUR per share, this would still result in a 4.35% dividend yield. Acceptable, but insufficient to entice new investors despite the reduced dividend tax of 12.8% in France.
Orange’s African and Middle Eastern divisions are interesting as they are still showing growth. The European divisions are getting quite mature and the investment in 5G will cost billions of Euros. I currently have no position in Orange (and am not very interested in the mature assets) but could consider writing an out of the money put option (either on the NYSE or Euronext Paris). Additionally, I will keep an eye on the planned spinoff of the African and Middle Eastern assets as those divisions appear to be more interesting due to their growth profile.
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