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Telefonica (TEF): Capitalizing From the European Debt Crisis



May 16, 2010 – Comments (9) | RELATED TICKERS: TEF

As the Euro continues to get absolutely demolished (EUR/USD is currently at 1.23 which we haven’t seen since April 2006, ouch!) there has been a lot of talk around the Fool discussing how to best take advantage of this situation. Some have offered up the idea of betting on a Greek recovery/survival and picking up shares of NBG or OTE. I have to say that OTE does make a compelling buy especially as it continues to set new 52 week lows. (I may eventually pick up some shares if it dips much lower.)

However, what concerns me with these plays and many others that Fools have mentioned is that while they may not be solely focused on the PIIGS, they are basically completely tied Europe as a whole. Now I don’t think the EURO will go down in flames, but I do believe they are not out of the woods yet so to speak, and that this recent debt issue raises serious and legitimate concerns overall its long term viability in the current form. Basically, I’d rather not buy into too many companies that only get their revenue from European nations as there is still potential for significant problems going forward IMO.

So the questions becomes, how to best take advantage of the recent EURO meltdown without having too much exposure to what may ultimately turn out being a prolonged European downturn/slow recovery/what have you?

Simply put, I believe the answer may be Telefonica (TEF).

TEF is the third largest telecom in the world; only behind China Mobile and Vodafone with yearly revenue of ~80B (yes billion) in US dollars. My point is, it’s a behemoth of a company and not going anywhere anytime soon. Even if the ERUO blows up tomorrow, TEF will still be, period.

Revenue and profit has been essentially flat the last three years, even though there was a worldwide recession. This is a huge positive in my book as it shows they are not very susceptible to economic downturns.

(Revenue, profit) (All numbers are in US dollars unless otherwise stated)

2007: 78B, 12.3B

2008: 85B, 11.2B

2009: 79B, 10.9B

2010 revenue est.: 80-82B

2010 EPS est.: 2.1 EURO (using today’s exchange rate (1.23) that is 2.58)

To be clear, Telefonica is traded on the New York Stock Exchange under the ticker TEF which is an ADR and represents 3 shares of the Telefonica company. Thus, current EPS for 2010 are 6.3 EURO or 7.75 USD (using 1.23 again). This puts TEF at a forward 2010 P/E of 7.1. Cheap!!! For comparison, Verizon and AT&T have forward 2010 P/E of 12 and 11 respectively.

The best part of TEF is actually the killer dividend, which has been consistently raised every year the last 5 years. Get this; the current dividend is 9.27%. What?!? (Ha ha ha, I feel like I’m GS and getting free money from the FED!) TEF is a dividend machine and has no intention of letting up anytime soon. In their most recent quarterly report, they reconfirmed their commitment to dividends and reiterated their guidance of issuing at least 5.25 EURO (6.46 USD using 1.23) per ADR share in 2012. Wowzaaa!

As I mentioned, I am looking for companies that derive their revenue from across a broad spectrum, specifically non-European countries. TEF is just that as they are a telecomm powerhouse in Latin and South America. Revenue breakdown for TEF in Q1 2010 was as follows:

Spain: 33%

Europe (minus Spain): 26%

Latin/South America: 41%

While they are somewhat dependent on European countries, they are not solely reliant on them.

 I am a big fan of South America going forward and actually believe this will greatly increase their revenue stream in the future. In fact, TEF still has a ton of room to grow IMO. Imagine that, a $80B yearly revenue company with actual growth prospects, yes! Q1 2010 growth rates (losses) were as follows:

Spain:  -5.7%

Europe (minus Spain): 7.2%

Latin/South America: 5.4%

Well there you have it Fools, a solid, extremely profitable company with a killer dividend, on the cheap. What else could you want out of life? Telefonica is looking more and more appealing to me by the day and just might have to pick up some shares in the near future. I’m not promising a “home run” return with TEF, but there is definitely upside potential here and an extra large dividend while you wait things out. From a quick technical perspective, they look to have some decent support around ~50. Depending on how things shake out in the European debt debacle, I might look to pick up shares of TEF there.

So quit reading and get out there and buy buy buy!

Ps, I’d definitely like to hear people’s thoughts on this and see if/where my logic is flawed. So come on Fools, bring on the criticism/snide remarks/stupid comments/etc.!

9 Comments – Post Your Own

#1) On May 16, 2010 at 10:37 PM, eatenbybears (< 20) wrote:

One of the few bright spots I see will be the sparks caused by investors grabbing up some of the Euro stars as they plunge down in the present economy.

 The list is actually quite vast, the secret to make them glow will be to hold off on buying until they get low enough to the ground without hiting.

TEF, BAYRY, PT ... all trail off as the Euro weakens

BAYRY, the ADR for Bayer AG trading at close to the bottom of it's 52 week range at $58. off an $81.60 high.  Others seem a bit high for the conditions, but the best thing about being in hunting/buying mode is that doing nothing costs nothing :)


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#2) On May 16, 2010 at 10:59 PM, Option1307 (30.45) wrote:

the secret to make them glow will be to hold off on buying until they get low enough to the ground without hiting.

I agree and am holding off for the meantime until we see some more clarity in terms of how Europe is going to shake up. The EURO/USD just took out it's previous recent lows (fall 08 and March 09) of 1.25. Currently we sit at 1.23 and could move significantly lower before we find more support levels. Thus, I will be holding off until then in all likeihood. 

but the best thing about being in hunting/buying mode is that doing nothing costs nothing :)

Couldn't agree more, nothing wrong with sitting a few plays out.

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#3) On May 16, 2010 at 11:19 PM, DrDraconian (< 20) wrote:

No major criticisms, just a couple of quibbles / issues:


The current dividend is not  over 9%.  The Quarterly indicated .65 euros just paid, with .65 more later this year.  thats 0.65 euro  x 2 x 3 x 1.23$/euro / $55/share = 8.7% .  Plus, any purchases in the near term will have missed half the dividend payments for the year.


The statement indicated that net cash flow was negative after payment of dividends.  This indicates a payout ratio of over 100%.  Not really sustainable, and net financial debt increased by 3B euros for the past year.  I don't see how they can expect to pay out the promissed 5.25 euro in dividend payments in 2012 if this continues. Also, I saw no mention of their expected 2011 dividend payout. Do you have any other indications what their plans are for 2011, and why they seem to have skipped over next year and gone straight to 2012?  Setting dividend expectations for 2 years out seems a little rediculous (ie a bit like wishfull thinking), given what has gone on in the markets the past year.


I'm also really concerned about the total net financial debt load, 45B euro and rising.  When interest rates start rising, as they almost have to soon, these guys are gonna get killed as they try to roll over their maturing debt each year. Just another threat to to the dividend.


The stock looks like a falling knife at the moment.  It does, however have potential, if they can keep control over their debt load, and the currencies of the markets they play in don't go crazy (they mention having to deal with hyperinflation in Venezuala).

I'll keep it on the radar, and will look for an entry at sub $50 per ADR, if it stabilizes.  Thanks for the heads-up.



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#4) On May 16, 2010 at 11:30 PM, megalong (< 20) wrote:

I agree, Telefonica looks like a great deal.  Other Spanish companies like Santander, BBVA, Iberdrola and Endesa also have attractive exposure to Latin America (although not as much as TEF).

Elsewhere in the Eurozone I think companies like Total, Novartis, GDF Suez, E.ON, RWE, Enel, Allianz, AXA, Deutsche Bank and other banks and insurers are also becoming good deals for American investors.

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#5) On May 17, 2010 at 12:33 AM, Option1307 (30.45) wrote:


The current dividend is not  over 9%

Yes you are correct, it is actually 8.27% as you mentioned. I used the US dollar dividend of $5.1 (2.55 *2 dividends/year). However this was based off of a previous EURO/USD exchange rate and is currently incorrect. Current yield is 4.797 USD/55.77 = 8.60%.

The statement indicated that net cash flow was negative after payment of dividends.  This indicates a payout ratio of over 100%. 

Payout ratio is currently around 60%. (See here). TEF paid out 6.941B in dividends in 2009 while net income was 11.157B, this gives you a payout ratio of ~62%. Net cash flow was negative this quarter not because of declining revenue/profit but because of financing/investments/etc. TEF has had a few quarters the alst 5 years that were net cash flow negative, but IMO this was only because of financing and/or acquisitions, thus not unexpectged or worrisome.

I'm also really concerned about the total net financial debt load, 45B euro and rising.

I agree the debt laod is high, but this is pretty much standard in the telecomm world. I'm not justifying it, just pointing out that this is relatively normal. VZ and T have debt loads of 61B and 69B USD respectively for comparison purposes.

The stock looks like a falling knife at the moment. 

Agreed. With the EURO/USD taking out the recent low of ~1.25 from fall 2008/spring 2009 there is not much support until significantly lower levels, this means TEF has more to fall IMO. I'll be keeping a close eye on this in the near term, waiting for stability in the EURO. But, as I mentioned above, even if the EURO continues to get smacked down and Europe as a whole has a prolonged recession/etc. TEF's revenue should not be significantly affected because of it's diversity.

Thanks for the thoughts, much appreciated!

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#6) On May 17, 2010 at 12:35 AM, Option1307 (30.45) wrote:


There ceretainly are a lot of other possibilities out there, more and more are becoming"cheap" everyday the EURO continues to tank. Although, I don't think I'd touch European banks just yet. They could experience signifcant pain in the short term.

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#7) On May 17, 2010 at 12:59 AM, megalong (< 20) wrote:

Yeah, I agree, I was just throwing some ideas out there that are on my radar.  The only European company I have bought shares of is Total.

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#8) On May 17, 2010 at 9:09 PM, megalong (< 20) wrote:

I bought some January 2012 $50 TOT calls today.  Break-even is up about 14%.  I am happy about this trade, I think it is a really good deal.

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#9) On May 17, 2010 at 10:18 PM, Option1307 (30.45) wrote:

I haven't looked into TOT very much, but that should turn a winner eventually.

As I mnetioned above, I don't believe the downturn in the EUR is finished just yet. Also, with a stengthening dollar, oil should continue it's recent slide. Both of these factors add up to TOT heading lower in the short term IMO. However, I still think you made a good play here, nust be patient.

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