Continuing a theme that not all great-looking dividends are suitable for income-oriented investors, France Telecom (NYSE:FTE) is having serious struggles in the market these days. Price-based competition is still a very real threat to France Telecom in Europe, while Africa is simply too small relative to Western Europe to make a substantial difference. That said, the lousy market performance of this stock seems to have washed out a lot of pessimism.

Investopedia Markets: Explore the best one-stop source for financial news, quotes and insights.

Dreary Results, as Expected
Little was expected of France Telecom for end-of-year results, and that's pretty much what the company offered. Fourth quarter revenues dropped about 3%, with a 4% drop in revenue from France (which is about 50% of the total). There weren't any real surprises in the "why" - France Telecom is under considerable pressure on price and customer retention. To that point, churn rose again - up 70 basis points from the third quarter and almost three points from the year-ago period.

To management's credit, they are compensating for revenue weakness with reasonable expense control. EBITDA for the period dropped about 4%, and EBITDA margin fell about a third of a point. For related reading, see A Clear Look At EBITDA.

Down Goes the Dividend
Although France Telecom's dividend yield pops out, the sustainability has been an issue. Now France Telecom has brought that home to roost, announcing that dividends will be supported by 40 to 45% of operating cash flow. That suggests a potential cut of around 10% for the next year.

Even with that cut, though, France Telecom's dividend yield will be quite competitive with Vodafone (Nasdaq:VOD) and at least in the ballpark with Deutsche Telekom (OTCBB:DTEGY) and Telefonica (NYSE:TEF). Moreover, it's hard to see that the high dividend yields at Telefonica and DT are all that much more sustainable, though at least Telefonica has a substantial Latin American business to prop up results.

Is Growth Even an Option?
One of the biggest issues for France Telecom and its Orange brand is the limited growth opportunities for the company. Europe is brutally competitive and markets like Poland, Turkey and Russia doesn't offer much upside. While Africa offers some reasonable long-term potential, it's just too small relative to France and Spain at this point to really make a huge difference.

Nevertheless, there is ample concern in the market that France Telecom is going to waste money on more M&A. There are certainly plenty of potential targets (especially in emerging markets), but Wall Street basically sees every mobile market as an eventual market in decline.

Perhaps the best that France Telecom can shoot for is a sort of sustainable level of competition in its core markets. Capital expenditure costs real money and the transition to 4G should create some opportunities for the company relative to bargain-priced providers who will continue to stay a generation or two behind and use that to offer value-oriented services. Among the bigger players, though, nobody has much vested interest in killing prices and creating a nobody-wins marketplace.

The Bottom Line
If the sell side is right, investing in France Telecom is mostly about betting that the story is going to get less-bad than most believe. Certainly there are rather modest expectations built into today's stock price. More to the point, the company can see free cash flow erode at an ongoing rate in the mid-single digits and the stock is still arguably underpriced. For related reading, see Free Cash Flow. Free, But Not Always Easy.

Eventually, France Telecom will settle down and be more or less an income conduit as a telecom utility. That doesn't leave huge potential in the shares, but it does seem as though the worst is in the past. While investors need to keep conservative expectations in mind here, snuffing out the last of the optimism may have actually made this a safer stock going forward.

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

At the time of writing, Stephen Simpson did not own shares in any of the companies mentioned in this article.

Related Articles
  1. Stock Analysis

    Allstate: How Being Boring Earns it Billions (ALL)

    A summary of what Allstate Insurance sells and whom it sells it to including recent mergers and acquisitions that have helped boost its bottom line.
  2. Options & Futures

    Cyclical Versus Non-Cyclical Stocks

    Investing during an economic downturn simply means changing your focus. Discover the benefits of defensive stocks.
  3. Investing

    Playing The Decline of Traditional Broadcast Media

    Broadcast media is losing viewership as cord cutting by the younger generation triggers subscription losses at cable and satellite companies.
  4. Investing Basics

    How to Deduct Your Stock Losses

    Held onto a stock for too long? Selling at a loss is never ideal, but it is possible to minimize the damage. Here's how.
  5. Economics

    Is Wall Street Living in Denial?

    Will remaining calm and staying long present significant risks to your investment health?
  6. Stock Analysis

    When Will Dick's Sporting Goods Bounce Back? (DKS)

    Is DKS a bargain here?
  7. Investing News

    How AT&T Evolved into a Mobile Phone Giant

    A third of Americans use an AT&T mobile phone. How did it evolve from a state-sponsored monopoly, though antitrust and a technological revolution?
  8. Stock Analysis

    Home Depot: Can its Shares Continue Climbing?

    Home Depot has outperformed the market by a wide margin in the last 12 months. Is this sustainable?
  9. Stock Analysis

    Yelp: Can it Regain its Losses in 2016? (YELP)

    Yelp investors have had reason to be happy recently. Will the good spirits last?
  10. Stock Analysis

    Is Walmart's Rally Sustainable? (WMT)

    Walmart is enjoying a short-term rally. Is it sustainable? Is Amazon still a better bet?
  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 >>

You May Also Like

Trading Center