Buy Telecom Italia: 6.5% Dividend Yield, 70% Cash Flow Yield And Cheap Valuations Present An Excellent Entry Point

| About: Telecom Italia (TI)

Despite the current economic turmoil surrounding the entire Eurozone, Telecom Italia (NYSE:TI) has performed well. The turnaround of losses in the last financial year, into profits in the current year, indicates that the company has strength in its operations. After a disappointing last year of operations, the company's domestic division has rebounded, and is on the right track, with other divisions performing well in terms of key business metrics like average revenue per users, churn and accesses. The stock has performed poorly in the recent past, losing almost 25% of its value on a YTD basis, however, we believe that such depressed levels for the stock could be a good opportunity for investors who go for dividend income. The stock has a dividend yield of 6.4%, well backed by its operating cash flow yield of 70%. The stock is trading at cheap valuations, not justified by its fundamentals and growth potential, and presents a very attractive opportunity for investors to take a long position in the stock.

Telecom Italia, headquartered in Milan, is involved in providing communication services to its customers in Italy, Brazil and Argentina. Services include traditional landline, mobile, internet and television. It has a market capitalization of almost $16 billion, and its stock offers a dividend yield of 6.4%. The stock is currently trading around its 52-week low of $8.15.

The company's major operating segments include Italy, Brazil and Argentina.





Total revenues including media/Olivetti























The table given above illustrates the consistent upward trend in the company's revenues, despite the current economic meltdown. In the financial year ended 2011, revenues increased by almost 9% compared to the previous year. Despite revenues continuing on their incline, the company's operations in Italy have largely been responsible for the slowdown of revenue growth. Traditional telephone revenues were down 4% in FY2011 compared to FY2010. The company has been suffering from losses of accesses, which were 14.7 million, down almost 5% from the previous year's 15.4mn accesses. However, an important thing to note is that the decline in lines is slowing down. TI's broadband sales have shown an improvement over the years, despite intense competition. In FY2011, the company was able to add more than 30,000 broadband accesses. The company's mobile services revenues have also been declining, and in FY2011, they suffered a loss of almost 8%. However, as with fixed telephonic revenues, revenues from mobile services in Italy are also on an improving trend. The slowdown started off at -12% in the first quarter of 2011, and at the end of FY2011, the revenue decline was only 2%. The total mobile customer base improved by over a million, with lower churn rates playing their part. Churn rates, even though high, are declining on a yearly basis. Overall, the traditional landline business is performing poorly for a majority of telecom carriers, and TI is no exception. Changing customer preferences have led to a decline in voice revenues for TI as well. However, the company has responded well to offer bundled packages to its customers, allowing them to enjoy various services like internet, voice and TV in one reasonably priced package.

Revenues from the company's Brazilian operations have shown strength in the last few years, improving by almost 20% in FY2011, compared to the previous year. Service revenues and equipment sale revenues have increased for the company in Brazil, largely due to the increased usage of high-end smartphones by customers. Total Mobile Lines for the company in Brazil have been increasing consistently, and in the year ended 2011, it was able to add almost 13 million new accesses compared to the previous year.


Year ended Dec





Mobile lines






The company has recently increased its marketing efforts in regards to the various voice and data plans on offers. Among the better performing packages was the one that offered the iPhone 3GS under the company's liberty plan. As mentioned in the company's annual report, a majority of the handsets sold to its corporate clients were smartphones, and we believe this represents a growth opportunity for TI's Brazilian division. As far as the company's Argentinean operations are concerned, growth in both mobile and broadband subscriptions is leading to an impressive growth in revenues. In the first quarter of 2012, revenues rose by a staggering 25% compared to 1Q2011. Mobile lines showed an improvement of almost 350,000 compared to the last quarter of the previous year, reaching a total of 18.5 million lines as of the first quarter ended 2012. Mobile services, which provide the Argentinean division with the majority of its revenues, seem to be doing well for the company, and this performance can be seen in almost all of its key business metrics, with average revenue per user improving by almost 16% in the first quarter of the current year. Similar improvements were seen in its broadband services, where total accesses increased by 16,000 in 1Q2012.

Recent Developments

Telecom Italia is apparently under a lot of pressure regarding its Media Division, and news of the company selling it off has recently surfaced. The company has decided to sell of its Media Division, partially because of its move to concentrate on its core business, and partially as a result of increased pressures from various rating agencies to cut down its debt. The company currently has debts in excess of $45 billion. We believe the company's decision to sell its Media Division is not such a bad idea, considering that TI media posted a loss of almost $16 million in the first quarter of 2012, increasing its losses further from the same quarter of the previous year.

Financial Strength

The company seems to have sufficient financial strength to withstand the current economic turmoil in Italy, as well as the rest of Europe. It has historically posted high gross margins (57%), and after its revenues dropped in the middle of the financial crisis, they have now recovered to the pre-crisis level. An increase of almost 9% from the previous year is an achievement. The company's bottom line contracted in the financial year ended 2011, which was largely due to impairment losses. Excluding the one-off impairment charge, the bottom line has shown consistent growth over the years. Moreover, the company has shown an impressive quarterly growth in its earnings of almost 10%.


The stock offers an attractive dividend yield of 6.4%, well backed by its operating cash flow yield of 70%. Its operating cash flows have risen by a two year compounded rate of almost 20% since FY2009. In 2011, the company paid dividends of $1.7 billion and generated operating cash flows of $11.1 billion, indicating the company's ability to afford its dividend payments going forward.


TI's shares are cheap, as reflected in its multiples. Both price-to-sales (0.42x) and price-to-book (0.57x) are at discounts to their industry averages.

In a previous article, we analyzed France Telecom (FTE), and we liked it for the dividends it offered as well as its exposure to high growth markets. France Telecom offers a very attractive dividend yield of almost 13%, which is well supported by its free cash flow yield of 20%.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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