Telefonica S.A. (TEF-N)

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.

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.

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.

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 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.

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.

Likes the company. Thinks they have some really great assets. Have been very astute at getting rid of non-core assets. Have some great businesses in very high growth areas such as Brazil and Argentina and Latin America. Has the opportunity to be a really hefty growth company. This business requires a lot of Cap X, which has hurt them a bit. Feels this is a unique company. Looking at the numbers, the Latin American site continues to do well. It is Spain that has really been hurt in the last little while. Thinks the stock will do well.

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.

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).

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.

Probably the telecom sector is not going to be a leader in this market. If you think the economy is slowly improving, you might want to be in more economically sensitive groups. This is a great company. Gives you a little yield of about 2%. It will be a huge beneficiary of an improving Europe, but will improve with the sector.

Although headquartered in Spain, this is really mainly focused in Latin America in many ways. Huge assets in Brazil, Argentina, etc. They are not given credit for a lot of the things they did. Cut their dividend and cut back on capital expenditure. Sold off some assets and funded themselves through cheaper areas as well. Expect there will be upside on the stock and it is not expensive.

Used to own this but got rid of it because of the high debt leverage they had. All European telecoms are fighting each other, competing on price and this is really having a drawdown on the ability of growing their EBITDA and cash flows. Brazil was negative this year. Had to sell assets to raise cash to pay down debts. Struggling right now. If he were a speculator with a long-term outlook, you might speculate on the stock price but don’t expect a whole lot over the next 3-4 years. Why bother investing overseas. Just buy one of the Canadian telcos.

He likes this one at this price. This was a very big growth story, a play on the emerging markets. Spain imploded and you cannot appreciate how difficult that is for a company to manage. They cut the dividend and are now aggressively paying down debt and really righting the ship. In a year’s time, this could be a very interesting story. They will reinstate the dividend at some point and this will move quickly. Once the dividend is reinstated and the balance sheet is back on side, this could quite easily be a €25 stock. Wait until Spain stabilizes.

A Spanish telecom company. Very difficult environment. They cut the dividend, which was smart. It gets a lot of its revenue from outside of Spain, though, in Europe and from Latin America. Doesn’t think Verizon will buy them.