French Play
France Telecom SA (ADR) (NYSE:FTE) is one of the world’s largest telecom operators. It provides data, multimedia, transmission, internet and mobile telecommunications services. The company operates under the France Telecom SA (ADR) (NYSE:FTE) and Orange brand names.
The company offers an extremely high dividend yield of 14.2%. France Telecom SA (ADR) (NYSE:FTE) generated around $17 billion from operations last year and has been continuously generating more than $15 billion for past five years. This gives us an OCF yield of over 60% which can easily sustain its dividend yield of 14.2%.
The telecom industry has a high earnings visibility because consumers usually have long term plans. This makes it relatively harder to shift from one carrier to another, resulting in a consistent stream of cash flows.
The global telecom industry has been sluggish due to the global economic slowdown. France Telecom SA (ADR) (NYSE:FTE) is not different and the company has posted a couple of bad quarters. There is talk of some major M&A activity in the European and American telecom sector and this should revive the industry to some extent. Despite these troubles the OCF yield is high enough to easily pay for the current dividend yield.
The stock is trading at a P/E of 9x, which is almost half the industry average. It is also at a 30% discount to mean sell side target price of $14.30. At these valuations, it is not only a lucrative dividend play but also has a huge upside potential.
Dutch Play
VimpelCom Ltd (ADR) (NYSE:VIP) provides voice and data services through traditional and mobile broadband. The company offers prepaid and contract plans to its mobile telecommunication customers. It also provides data, voice and internet services to a multitude of corporate clients.
The company has one of the most sound and efficient business model in the entire industry. In this tough economy, the company has managed to maintain an impressive revenue growth rate of 38% while the industry is shrinking by 3%.
The company is trading at a forward P/E of 7.5x which is way below industry average 26x and S&P P/E of 15x. VimpelCom Ltd (ADR) (NYSE:VIP) offers a stellar 13.5% dividend yield which is above the industry and sector averages. It generates approximately $7 billion in annual operating cash flows and pay approximately $2 billion in dividends. This gives us an OCF yield of 42%. The high OCF shows that the company can easily manage its 13.5% dividend yield. The company is trading at a 20% discount to mean sell side target price and is an excellent investment for dividend growth and capital appreciation.
