Is Telefonica (TEF) of Spain a Good Dividend Buy?

Bringining in dividends at 8.30%, is Spain's largest communications group a safe and sustainable dividend payer, or is it going to the dogs like the rest of Europe?

The Greek economic and European sovereign debt crisis has tainted all things Europe with a leper-stick. Such wide-scale selling has resulted in some high quality business being sold down to levels that are not only below intrinsic value, but also produce dividend yields way above normal.
 
One such company is Spanish-based Telefonica S.A. (TEF). The communications company, with a market cap of $86 billion, is currently yielding 8.30% in dividends.
 
Telefonica (TEF) is one of the world's largest telecommunications companies by market cap. Its activities are centered mainly on the fixed and mobile telephony businesses, while its broadband business is the key growth driver underpinning both. It operates in 25 countries and its customer base exceeds 264 million globally. Telefonica’s (TEF) growth strategy is focused on the markets in which it has a strong foothold: Spain, Europe and Latin America.
 
Telefonica (TEF), while based in Spain, is hardly even a Spanish company: more than 60% of its business is outside of Spain. In Spain, the company provides services to more than 46.7 million customers, while in Latin America, the company has more than 168.5 million customers (that’s half the population of the United States!). Telefonica (TEF) is the leading communications operator in Brazil, Argentina, Chile and Peru and is second or third in Colombia, Ecuador, El Salvador, Guatemala, Mexico, Morocco, Nicaragua, Panama, Puerto Rico, Uruguay and Venezuela. In addition to the Spanish operations, there are also big businesses in other European countries such as the United Kingdom, Ireland, Germany, Czech Republic and Slovakia, providing services to more than 49.2 million customers. This truly is a global company.
 
The rest of the facts are truly staggering: There are 250,000 people working for the company, a total of 264 million customers, 202 million cellular network users, 15 million Internet users and 2.5 million pay TV subscribers.
 
At current prices the company is trading on a 9.25 times PE (the industry average is over 16 times). Price to sales comes in at 1.26, which is more than half the industry average of 3.55 times. In addition, the price to book comes in at 3.38 times which is way below the average of peers at more than ten times. Based on its gross margin, operating margin, and net margin, Telefonica (TEF) converts a larger percentage of its revenues to profits than most other companies in the Communications Services industry. The company is profitable with an operating margin of 23.50%.
 
The company has also stated intent to raise the dividend 25% next year, and 25% after that by 2012. Such affirmation was confirmed in the company’s latest quarterly results. Telefonica (TEF) is also buying back shares – over the past 2 years, the company bought back 150 million of its shares (over 3% of shares in issue).
 
Over the past five years, the dividend has increased 306% as net income doubled and total revenue increased 51%. Telefonica’s (TEF) exposure to emerging markets has put it in an especially strong position going forward, despite the troublesome Spanish economy. There is still a lot of upside revenue to be had in the markets where the company operates, and it is likely to continue to generate in excess of $20 billion of cash each year. As such, the dividend is sustainable and is going to increase going forward. What’s more, the stock is currently on sale on Euro worries – the whole scenario provides a good opportunity for long-term income seeking investors to produce an 8.50% annual income stream with low capital risk.

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