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Taking Advantage of the European Crisis



November 30, 2010 – Comments (4) | RELATED TICKERS: TEF

Similar to how I recently took advantage of the tragic BP Gulf Oil spill to purchase stock in the offshore driller Ensco (ESV) and Transocean bonds when their values dipped (and have subsequently recovered significantly), I am considering using the continuing turmoil in Europe to add shares of a quality company to my portfolio that had its stock price temporarily impacted by the situation.

Here's a short blurb that I wrote on a quality Spanish company, Telefonica (TEF) back in June that seems appropriate again today:


Spaniard, Spaniard, Spaniard!

Much like in the movie Gladiator when Maximus Decimus Meridias rises up from ruin to become the hero of a nation, I expect another Spaniard, not a person but a company, to rise from the ashes of a country in economic turmoil to eventually produce outstanding returns for investors.

The company that I'm talking about is Telefonica (TEF). I added TEF to my CAPS portfolio a little over a month ago. The stock is down around 6% since then, versus a 3.5% drop in the benchmark S&P 500.

My thought process in giving Telefonica the green thumb in CAPS is that it is an outstanding global company that pays a huge dividend which is being unfairly punished because it has its headquarters in one of the infamous PIIGS nations. The reporter who follows European stocks for Barron's, Vito Racanelli, agrees. He penned a bullish article on the stock for this week's magazine titled Don't Hang Up on Telefónica.

Yes, the Spanish economy is a mess. The official unemployment rate there of 20% makes the 10% that we're experiencing here in the United States today look like a utopia. Spain's Ibex 35 index has been the worst performing European index thus far in 2010, and that's saying something. It's down 20% YTD. Telefonica's U.S.-listed ADR - TEF, which trade in dollars instead of Euros, have been hammered even worse, down over 33% YTD.

Since Spain is such a mess, why would I want to buy stock in a company from there? Even though TEF is a Spanish company, it derives nearly two-thirds of its revenue from outside of the country. A huge chunk of that comes from its rapidly growing operations in Latin America. Telefonica's foreign operations were so strong that even though its revenue in Spain fell by 6% during the first quarter, it managed to grow its revenue and earnings by 2% company-wide. 

Cheap companies that pay dividends always catch my eye. Telefonica has both of these attributes. Its ADRs are trading at their lowest multiple of earnings in history. They currently sit at around only 8.5 times analysts' estimated 2011 earnings.

European companies pay dividends a little differently than companies here in the United States that generally make a fixed payment to shareholders every quarter. Most European companies pay dividends only once or twice per year and their payments are much more variable (depending upon earnings). In 2009 TEF made two dividend payments to U.S. ADR holders, $1.999 in May and $2.207 in November for a total of around $4.21/share. At today's stock price of $59, that's equivalent to a dividend yield of over 7.1%. 

TEF has already made one dividend payment so far in 2010, $2.558 in May. As you can see, this is already significantly better than its payment in may of last year. I don't know what the company's November payment to shareholders will be at this point, but we're probably looking at a company that will have an ADR dividend yield of 8% to 9% for the year, which needless to say is outstanding.

Are there risks in investing in Telefonica. You bet, that's why I have not committed any real money to this idea yet. First and foremost is currency risk. After a short breather in the short term, I expect the Euro to continue its decline versus the U.S. dollar, perhaps falling as low as parity at some point. 

There's also a risk that the company will spend its money on a huge acquisition, it is rumored to be interested in Dutch telecom Royal KPN (KKPNY.PK) and the 50% stake in Brazilian telecom Vivo Participacoes (VIV) that it doesn't already own.

And of course, the global economy could always collapse or the Euro could implode. Neither of those things would be good :).

To me, at this level a lot of bad stuff is already priced into Telefonica's stock. I plan on holding it in CAPS for a long time. 

This short write-up is nearly six months old.  I'm sure that some things about TEF have changed since then.  I'll have to do some more research on the situation before committing any real money to it.  Still despite not surprising weakness in its Spanish operations, during its most recent quarter Telefonica reported that its EPS more than doubled year-over-year.  The bulk of this increase came from the company's strong Latin American operations.

Now Telefonica is not without risks.  It has a ton of debt, which I am always leery of...especially after what we have seen happen over the past several years.  Furthermore, telecommunication companies always face tough competition for market share.  Still, a European company that is getting hammered along with the overall markets there yet sees the bulk of its profits come from Latin America seems like a solid investment thesis to me.  I'd love to hear others' thoughts on Telefonica specifically, or on using the recent weakness to invest in European equities in general.


4 Comments – Post Your Own

#1) On November 30, 2010 at 3:37 PM, portefeuille (98.87) wrote:

the old post.

Spaniard, Spaniard, Spaniard


see comments #1,6,7,8 there.

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#2) On November 30, 2010 at 3:40 PM, portefeuille (98.87) wrote:

I bought a few TEF shares yesterday (see comment #42 here, 25 shares in my portfolio now).

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#3) On November 30, 2010 at 3:51 PM, ETFsRule (< 20) wrote:

TEF looks interesting, but their P/B and debt/equity ratios are both extremely high.

Too risky for me.

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#4) On November 30, 2010 at 11:51 PM, Option1307 (30.57) wrote:

Still, a European company that is getting hammered along with the overall markets there yet sees the bulk of its profits come from Latin America seems like a solid investment thesis to me.

Exactly, this is why I was drawn to it in the beggining and picked up a small position this past summer. Debt load is definitely high but managable IMO. TEF seems like a decent play on Latin America that you can pick up on the cheap b/c of it's "European roots", plus a killer dividend.

I've been thinking about adding to my position with the recent EURO decline and jsut may if it dips much lower in the coming week/etc.

or on using the recent weakness to invest in European equities in general.

You beat me to the punch on posting a blog about this, I was thinking the same thing today. I know Europe and specifically the EURO have problems, but hey who doesn't these days right?

Right now I like STD and TEF.

BCS could be worth a look as well. Although if it drops much below ~$16 I would be worried that ugly times are in it's near term future as this is currently acting as support.

E and TOT are becoming attractive again, at least in Caps, I don't follow them too closely to invest actual $$. Besides, oil is currently at the high end of my comfortable range.

I don't follow European equities too closely and would love to hear what others are currently thinking.


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