Portugal Telecom: Neglected Stock With A 15.82% Yield

| About: Portugal Telecom (PT)
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Portugal Telecom (NYSE:PT) is the largest telecom company in Portugal and it has a de facto monopoly in the country. It mainly operates in Portugal and Brazil although it has a significant presence in many other countries including China and some African countries. It has a market capitalization of $3.9 billion and a price per share of $4.34. It trades on the New York Stock Exchange.

Portugal Telecom offers a very attractive dividend. The projected yield for this year is 15.82% and year to date it has paid a dividend at an annual rate of 21.14%. In 2011, it paid out a dividend yield of 19.64%. This is compared to an average dividend yield of 2.64% from the S&P 500.

Portugal Telecom recorded cash from operations of €1.775 billion in 2011. It already spends a large portion of its cash from operations on capital expenditures, €1.271 billion. Therefore, it had a free cash flow of €558 million in free cash flow which it had free to spend on tackling debt levels and paying shareholders back in dividends. Consequently, it can easily maintain steady dividends to shareholders. It should record similar or improved numbers this year as the European Union's decline seems to have bottomed out.

The company's quarterly numbers are also good. In the most recent quarter, revenue grew by 82.27% compared to Q1 2011 to €1.716 billion. Capital Expenditures were €259 million, a 112% increase due to a rapid increase in expenditures in Brazil, as Portugal Telecom expands there through Oi (NYSE:OIBR). Oi is a Brazilian telecom company which Portugal Telecom owns a substantial stake in. Portugal Telecom currently has 2.7 million fixed lines in service, 7.4 million wireless subscribers, 1.1 million broadband subscribers, and 974,000 pay television subscribers.

Portugal Telecom is also an attractive investment if you examine it compared to the industry averages. It has a price/earnings ratio of 11.4 vs an industry average of 20.4. It has a price to sales of 0.4 vs an industry average of 1.1. Its operating margins and net income are very similar to the industry average. The two ratios point to it being significantly undervalued compared to its competitors. Therefore making it not only a good dividend buy but also a good growth and value buy.

The growing market in Brazil, where Portugal Telecom continues to expand through Oi, is another indicator of success for this company. Its economy is now over $2.5 trillion in size and it is set to surpass France this year as the world's fifth largest economy. The telecom industry represents 5% of the GDP of Brazil and the industry is expected to grow in excess of 30% over the next four years. Also, smartphone sales in Brazil were up more than two thirds in Q4 2011 compared to Q4 2010.

Morningstar rates this stock as 5 stars. Its fair value estimate for the company is $8.00 per share, an 80% increase on the current price. It suggests to consider buying at $4.80 and consider selling at $12.60. The Motley Fool gives Portugal Telecom a coveted 5 star rating as well.

Portugal Telecom has fallen due to fears in Europe, however it will continue to grow due to its presence in Brazil and Africa. It is a bargain at current prices and at the current dividend yield.

My data is from morningstar.com and google.com/finance.

Disclosure: I am long TEF, VIV.