France Telecom's 12% Yielding Shares May Be Poised To Drop On A Dividend Cut

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France Telecom (FTE) is a leading provider of communications in France, and offers services such as Internet, mobile phones, and fixed-line communications. At first glance, the company's shares look very attractive, especially for income investors, as the stock sports a current yield of about 12%. However, there are a number of factors that are likely to lead to a much lower yield, and even a decline in the share price.

The issues for this company include a European economy that continues to decline, growing competition in the French telecom market, rising unemployment in France, and a company that appears ready to cut the dividend rather sharply. (The company is also coming under pressure from French Unions to cut the dividend.)

A recent Barron's article summarizes the view of France Telecom's deputy CEO, Gervais Pellissier, who seems to be very clearly warning investors that the dividend will be cut in the future. The article states:

"Too attractive," Pellissier says of the level of FTE's dividend. "Most people believe you will not pay it for long. We prefer to have a credible dividend policy." Pellissier said FTE's goal is to create a more realistic dividend policy that's "sustainable for more than one year" and cited plans to bring the company's dividend down to somewhere between 40 and 45% of operating cash flow."

Aside from a potentially large dividend cut, France Telecom is also facing a macro environment that is likely to lead to declining revenues and profits in the coming years. Part of this is due to the rise in unemployment in France, but another reason is due to competition.

A French company called "Illiad" started providing low-cost mobile phone communication services in January, 2012. This company has ignited a price-war in the mobile phone industry. Illiad also provides broadband services and now has about 5.1 million subscribers. It also has seen rapid growth in mobile, which has now reached about 3.6 million subscribers, or about 5.4% of the total market, in just a short period of time.

There are simply too many headwinds facing this company now due to the condition of the economy and fierce competition. These issues are likely to reduce profit margins for the company, and even further, lead to a reduction in the dividend.

Spain's leading telecommunications company, Telefonica (NYSE:TEF) cut its dividend earlier this year, and the shares plunged. Telekom Austria (OTCPK:TKAGY) just announced a 87% cut in its dividend, and the shares dropped. Investors need to prepare for the same possibility at France Telecom as well.

Here are some key points for FTE:

  • Current share price: $12.22
  • The 52-week range is $11.68 to $19.41
  • Earnings estimates for 2012: $1.80 per share
  • Earnings estimates for 2013: $1.69 per share
  • Annual dividend: about $1.50 per share, which yields around 12%

Data is sourced from Yahoo Finance.

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.

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