Telefonica More Than Just Its Dividend

By Greg Sushinsky | August 22, 2010 AAA

Spanish telecom giant Telefonica (NYSE: TEF), like so many telecoms, pays a generous dividend - yet it also has the potential for real growth. Although the company has its European business, it is actively expanding in the emerging markets in Latin America.

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Dialing Up Dividends

Telefonica pays a dividend that currently yields 7.36 percent. The two main U.S. domestic telecoms, Verizon (NYSE: VZ) and AT&T (NYSE: T), pay dividends that now yield 6.42 percent and 6.23 percent, respectively. Investors who are looking for strong, stable yields may simply prefer to stay with one or both of those U.S. stocks out of familiarity or comfort - no small thing in a turbulent market. The lack of growth historically in both companies, along with their limited prospects for future growth, may encourage investors to look elsewhere.

Telefonica's Growth Potential

Telefonica's dividend is undergirded by sufficient fundamental strength, with earnings per share (EPS) of $6.63 and a dividend payout of $4.91 per share. It has a cash flow coverage ratio of 1.25. (To learn more, see: Cash Flow Indicator Ratios: Cash Flow Coverage Ratios.) What is intriguing about Telefonica is its potential for growth. Forty percent of the company's market is now in Latin America. This, not the weak Spanish economy or even the ultra-competitive market in the rest of Europe, will become an increasingly important part of the story for Telefonica. While France Telecom (NYSE: FTE) and Telecom Italia (NYSE: TI), along with Vodafone (Nasdaq: VOD) fight for the limited growth prospects in Europe, Telefonica is reaping the opportunity in Latin America, one report calling its presence "dominant". Revenues are improving even in its home base of Spain.

Fixed Line Versus Mobile

Every telecom has to deal with the fact of decreasing fixed telephone use. Telefonica has shown growth in the critical mobile segment, with a 9.7 year-over-year increase, along with growth in broadband, pay TV and data. Telefonica has positioned itself via a stake in the Brazil mobile phone market that will make it the leader there. The Brazil market currently has 150 million cell phone users. Growth for Telefonica's mobile business is rapid not only in Brazil, but also Argentina, Chile, Columbia and Peru.

Telefonica's Future

Growth should continue to be robust in the still-fresh Latin America market. European revenues are already rebounding. The company generated roughly $9 billion in free cash flow, and it continues to grow cash from operations annually. Telefonica is committed to growing its dividend. The company's deep commitment to the emerging markets in Latin America has entrenched it, so it will be able to mine more revenue and earnings growth as it expands in that region.

Investing In Telefonica

The downgrading of most things European and certainly everything Spanish due to the sovereign debt crisis has left an opening for investors to consider Telefonica stock. The stock has a forward P/E multiple of just over 10. Revenue and earnings growth are in the offing, even in this sluggish global economy. The rich dividend is reasonably secure, and the stock trades at slightly more than a 25 percent discount to its 52-week high. This is not a situation where you would be chasing yield, but instead investing in a generous dividend stock with the kicker that the company is aligned for growth.

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