Telecom Italia S.p.A. (ADR) (NYSE:TI)

CAPS Rating: 2 out of 5

The Company is engaged in the communications sector and particularly in telephone and data services on fixed lines, for final retail customers and wholesale providers, in the development of fiber optic networks for wholesale customers.

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Player Avatar Weeeeeeeee (< 20) Submitted: 5/7/2011 11:03:07 AM : Outperform Start Price: $12.49 TI Score: -56.95

I've invested in the Telecom Italia prefered (savings) shares, symbol TITR, listed on the exchange of Milan. The savings shares have no voting rights, but in exchange for this you get a minimum dividend of 5% of the nominal value of the shares (E 0.55) when the company makes enough profit, and you will always receive a dividend that is 2% of the nominal value of the shares higher than the dividend on regular shares. This means that dividend yield for this year was about 8%, and if management's statements that they want to raise dividend payout by 30% over the coming years come true, you will be looking at a yield of 10%-11%. Combine this with a P/E of around 6, P/CF of 2.5, P/B of 0.6 and you are already looking at a very attractive investment. Granted, their ROE is not very impressive (although not too bad either), but at current prices this just means there is still a lot of room for improvement; and that is exactly what the company is trying. A few weeks ago, key members of the executive board were replaced by people brought forward by the largest shareholder, Telco, which is a joint venture set up specifically to own a large stake in TI, and of which Spanish Telefonica is in turn the largest shareholder. I expect that this new board will continue to increase shareholder value by cost cutting operations in Italy, further reducing debt (which is already quite low compared to a lot of competitors) and increasing operations in emerging market South America, notably Brazil and Argentina.There is still a possibility that Telefonica will choose to increase its stake in TI, especially for the current low prices (they bought their current stake a couple of years ago when the regular share was still trading above E 2,-, and maybe buy the entire company in order to strengthen its own position in Latin America. This is far from certain of course.All in all, I believe TI shares, and especially the savings shares, are a very promising long term investment.

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