Telecom Italian Offers An Opportunistic Dividend Opportunity

| About: Telecom Italia (TI)
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Telecom Italia (NYSE:TI) is a telecommunications company sporting a yield of approximately 9.1%. The dividends are paid annually. The stock should be put on investors' "watch list" if their currency issues are resolved, the high annual dividend could clearly make the stock a bargain at current prices.


Telecom Italia, Italy's largest telecom services provider, was formed in 1994 in preparation for the Italian government's privatization of state-owned industries as an agglomeration of five state-owned telecom related enterprises - Iritel, Italcable, SIP, Sirm and Telespazio - that were knitted together to form Telecom Italia. In 1995, Telecom Italia setup Telecom Italia Mobile and launched the world's first prepaid, rechargeable phone card. In 1997, Telecom Italia was privatized and has been operating independently since then.

Telecom Italia subsequently pioneered the launch of several new services in Italy - GPRS, wireless broadband, MMS, mobile TV, public wi-fi, broadband mobile networks, Internet TV, mobile payment solutions, mobile ultra-broadband with speeds of up to 28 Mbps and Long Term Evolution technology with 4G networks of up to 140 Mbps. Today, Telecom Italia serves residential, business and government customers with the full suite of fixed voice, broadband Internet and data, and mobile services and solutions. The company reported total revenues of close to $40 billion for 2011 and over 84,150 employees. Its American Depositary Receipts are listed on the NYSE.

Credit Default Swaps:

France and Italy have both come under the scrutiny due to their respective currencies in view of the Credit Default Swaps.

Business Strategy:

Over the years, Telecom Italia has grown through acquisitions and expanded beyond its telecom focus into media and computer hardware. Telecom Italia now has multimedia interests, operates television channels and also owns Olivetti, a computer and business equipment manufacturer which is an insignificant contributor to revenue and earnings. Selectively, Telecom Italia has also expanded overseas and currently has operations in Argentina, Brazil and Paraguay. In 2009, Telecom Italia adopted a consumer-centric business model and refocused its business on three client segments - consumers and families, business (small and medium enterprises, home offices) and enterprise (its top most tier which includes large industrial and services enterprises, banks and government services). With a severe slowdown in Italy due to sovereign debt woes, Telecom Italia plans to focus on improving operating efficiency, maximizing asset utilization and growing its customer base and revenues in Argentina, Brazil and Paraguay. Telecom Italia also plans to focus on debt reduction initiatives and improve long-term profitability to restore dividend payment levels.


For its 2011 fiscal year, Telecom Italia reported total revenue of $39.5 billion with 63.5% from its Italian operations, 24.5% from Brazil, 10.7% from Argentina and the remaining 1.3% from Paraguay, Olivetti and other operations. 2011 revenues represent an 8.7% increase over 2010. The company reported EBITDA (earnings before interest, taxes, depreciation and amortization) of $16.1 billion, a 7.3% year over year increase with significantly higher margins in Italy (48.6% EBITDA margin) than in Brazil (16.3%) or Argentina (8.5%, the lowest EBITDA margin). In 2011, Telecom Italia spent $8 billion on capital expenses tied to routine upgrades and the acquisition of LTE frequency licenses for ultra-high speed mobile services. It generated $7.6 billion in operating free cash flow, $587 million less than 2010 because of the LTE license costs, barring which Telecom Italia would have increased operating cash by $511 million. Telecom Italia held a whopping $37.4 billion in outstanding debt and had cash of $10 billion at year end that is enough to meet its debt obligations for 24 months.


For 2011, Telecom Italia plans to pay a total of $1.2 billion in dividends (62 cents per share, payable April 2012), with the goal of raising dividends after it reduces its high outstanding debt load, in what are economically strained times in Italy for debt issuers and consumers. At current share price levels of $11.5 as of March 2012, Telecom Italia shares have a dividend yield of 5.3%. However, the sustainability of this dividend may be questionable given economic uncertainty in Italy.


Telecom Italia shares have been under pressure over the past twelve months. As of March 2012, shares traded at $11.52 with a P/E ratio of 164x (primarily because of the very small earnings per share number) and a market capitalization of $15.3 billion. Telecom Italia shares had a 52-week range of $9.74 to $15.70. Shares are under an economic dark cloud because of Telecom Italia's massive debt load and uncertainty over Italy's economic future. Shares have significantly underperformed market indexes in the U.S. over the past year.

Peer Group:

Telecom Italia is in the same category as other geographically diversified telecom operators listed in the U.S. such as BT Group (NYSE:BT), Deutsche Telekom ADS (OTCQX:DTEGY), France Telecom (FTE), Verizon Communications (NYSE:VZ) and AT&T (NYSE:T), Telefonica (NYSE:TEF). Telecom Italia's 5.3% yield is middle of the pack relative to its peers while its P/E ratio is currently not meaningful.


AT&T is riding the coat tails of Apple's latest iPad. Smartphones, tablets are all requiring 3g and 4g connections. AT&T is leader in this telecom space within the U.S. AT&T has 4 core business segments: 1) wireless; (2) wire line; (3) advertising Solutions; and (4) other (miscellaneous).

Although AT&T had less than projected earnings in the fourth quarter, the cause was explainable due to subsidies for smart phones. This includes the Apple iPhone 4S.

Verizon Communications

Verizon is on the verge of 12 years old. The company was created when Bell Atlantic and GTE merged in June of 2000. The company raised the quarterly dividend in the 4th quarter of 2011 to 50 cents per share. This equates to a 5.1% annual yield.

France Telecom

France Telecom offer fixed, wireless, and mobile telecom services, data services, and other related telecom communication services. The company has historically offered a high dividend yield.

BT Group

BT Group offers telecom communications solutions and services worldwide. The company offers fixed line and wireless services to the U.k.. The key business units include BT Global Services, BT Retail, BT Wholesale, and Open reach.


The industry is bit extended in valuation. Telecom Italia is dealing with currency issues, as highlighted by the credit default swap valuation,has a market dependent upon the Italian currency issue resolving itself. The group appears to be over bought on investor defensive purchases. I would avoid this sector for now, accept for Telecom Italia.

Disclosure: I am long VZ.