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.

IN PICTURES: 9 Simple Investing Ratios You Need To Know

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.

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Related Articles
  1. Stock Analysis

    Analyzing Altria's Return on Equity (ROE) (MO)

    Learn about Altria Group's return on equity (ROE) and analyze net profit margin, asset turnover and financial leverage to determine what is causing its high ROE.
  2. Investing News

    Icahn's Bet on Cheniere Energy: Should You Follow?

    Investing legend Carl Icahn continues to lose money on Cheniere Energy, but he's increasing his stake. Should you follow his lead?
  3. Stock Analysis

    Analyzing Google's Return on Equity (ROE) (GOOGL)

    Learn about Alphabet's return on equity. How has its ROE changed over time, how does it compare to its peers and what factors are driving ROE for the company?
  4. Investing News

    Is Buffett's Bet on Oil Right for You? (XOM, PSX)

    Oil stocks are getting trounced, but Warren Buffett still likes one of them. Should you follow the leader?
  5. Investing News

    Chipotle Served with Criminal Probe

    Chipotle's beat muted expectations and got a clear bill from the CDC, but it now appears that an investigation into its E.coli breakout has expanded.
  6. Stock Analysis

    Analyzing Sprint Corp's Return on Equity (ROE) (S)

    Learn about Sprint's return on equity. Find out why its ROE is negative and how asset turnover and financial leverage impact ROE relative to Sprint's peers.
  7. Stock Analysis

    Why Alphabet is the Best of the 'FANGs' for 2016

    Alphabet just impressed the street, but is it the best FANG stock?
  8. Investing News

    A 2016 Outlook: What January 2009 Can Teach Us

    January 2009 and January 2016 were similar from an investment standpoint, but from a forward-looking perspective, they were very different.
  9. Mutual Funds & ETFs

    3 Vanguard Equity Fund Underperformers

    Discover three funds from Vanguard Group that consistently underperform their indexes. Learn how consistent most Vanguard low-fee funds are at matching their indexes.
  10. Investing News

    Alphabet Earnings Beat Expectations (GOOGL, AAPL)

    Alphabet's earnings crush analysts' expectations; now bigger than Apple?
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>
Trading Center