Paul Harris, CFA Telefonica S.A. TEF-N COMMENT Oct 30, 2014

In expanding to Latin America, it almost choked them. Ultimately the dividend got cut. Now Spain is better and TEF-N is doing better. Stock is rising on the back of better demand in Europe.

Making some strategic moves including a bid for a Brazilian phone company. This is not going to be an income stock the way it used to be. Repositioning themselves as more of a total return stock. If looking for a phone company to produce income, you are probably better off with one of the Canadians or something like Vodafone (VOD-Q).

Spain effectively imploded, which was the home market for this company. The dividend was cut and the balance sheet debt got to a very, very high level. When the dividend got cut, the stock rebounded quite nicely. The challenge he has is that it is returning to its bad old days of adding more debt to the books. A good quality company, but there are better places to be. He would prefer China Mobile (CHL-N) which has more cash than debt on their books. Pays a decent dividend.

They are getting quite serious about restructuring the business. In Europe, when there are regulatory changes and they embrace higher phone charges, it will mean that incumbent telephone operators will be able to dole out fibre, which will be very profitable for their businesses. Because of this, all European telecoms are running. When the dividend is re-introduced and the growth coming on, it will be a longer-term story. There are some interesting stories here, but you have to be a little bit careful in terms of the governance. He is sitting on the fence, but thinks there is a lot of upside from these levels.

The challenge was that Europe crashed and Spain almost strangled the whole business, then there were currency issues in Latin America. Longer term they need to get the debt down and then it will be a good story.

Usually when a dividend yield is getting up over 10%, it means that there is something on the horizon and the dividend either has to be cut or they really have to raise their business in a big way. The difficulty for this company is Europe. There is a lot of competition and price cutting going on. It is very difficult to make a lot of money because margins are very thin. This company also has investments in Latin America and South America. If Brazil’s government bonds are downgraded, it will have a big impact on this company. He would avoid this stock right now.

The problem is competition. Prices have continued to be cut. The dividend has been dropping and the CEO announced his retirement. He sees no good reason to own European telecoms.

Don't buy stocks because of high-yield. You need growth in the dividend, not high-yield. A high yield is usually indicative of bad organizational problems. The dividend on this company has gone down 46% in the last year alone. Down 5%-10% in the last 4 years. Brazil was a problem 5-10 years ago. Europe continues to be an issue because all these companies are marketing like crazy and giving big discounts. Also, they are highly indebted. Trading at around 4X debt to cash flow, where 2X is adequate. He would stay out of the telco sector completely, especially the European ones.

It's a telecom, which is the worst industry to ever invest in. Telecoms are being swept into the new communication industry which will also include media, cable and internet search. The telecom industry will cease to exist. He's not intersted in telecoms at all. It's crazy. He once paid for long-distance calls; now, they're giving away long-distance calls. Stay far away from this. If you want a dividend, look for a company that's growing its dividend.