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Telefónica SA: Corporate Doublespeak (TEF)

May 15, 2012 | About:
Yesterday, Spanish telecommunications juggernaut Telefónica SA (TEF) announced that it will be giving its shareholders the choice between accepting the upcoming dividend in cash, or in shares as a scrip dividend. Normally, I wouldn’t make note of something this mundane, but I was caught off guard by this statement by the company’s Chairman (emphasis mine):

Over the course of the Shareholders’ Meeting, which was held in Madrid, the Chairman of Telefónica and its Board of Directors, César Alierta, presented a report in which he described as exceptional the dividend yield offered by the Company, stating that it is “the highest return of the world’s top one hundred companies by market capitalisation, underlining our Company’s steadfast commitment to its shareholders.”
This statement is disingenuous at best, intentionally misleading at worst. A dividend yield has two components, one being the actual dividend payment and the other being the market price of the company’s equity. The Chairman is implying that the company is so committed to its shareholders that it has chosen to pay out a shockingly high dividend as reward.

This is not the case.

Instead, the reason for the company’s high dividend yield is that the company’s share price has tanked by 42% over the last year. If you hold the dividend payout steady, this has the effect of increasing the yield (due to a lower denominator). None of this implies a “steadfast commitment to shareholders.”

Making matters worse is the fact that the company’s actions are diametrically opposed to what the Chairman is suggesting; the company is actually cutting its dividend from the prior year!

I am not suggesting that the company shouldn’t be cutting its dividend (given the price decline, I would favour eliminating the dividend and diverting that capital toward share repurchases), but I am suggesting that transparently misleading investors about the company’s largesse is wrong.

One more thing from the company’s marketer-in-chief (emphasis mine):

According to César Alierta, this dividend “translates into a 13.3% yield at the current share price(*), which means that Telefónica remains an excellent investment opportunity even in the challenging current economic circumstances.”
The emphasized statement does not logically flow from the discussion of yield, which on its own is an insufficient measure of an investment (there needs to be consideration for the sustainability of that dividend!).

It worries me to see a company’s Chairman make misleading statements like these, seemingly with the purpose of fooling investors. What do you think?

Author Disclosure: None

About the author:

Frank Voisin
Frank is an entrepreneur who owned four restaurants by the time he was twenty. He sold his businesses and returned to school, completing a concurrent Law / MBA degree. At the same time, he successfully completed all three levels of the CFA exams. He now invests full time with a focus on value investing. Frank Voisin writes about value investing topics at http://www.frankvoisin.com.

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Rating: 2.9/5 (11 votes)

Comments

jonmonsea
Jonmonsea premium member - 1 year ago
True.

It does seem cheap and gives exposure to Latin Amer. A cheap company that is leveraged can be wiped out to zero or diluted down the drain in times of capital market lock-out. How long could the company sustain in the face of some Latin american nationalizations and W. European severe and prolonged recession with competitors who are cash-rich and willing to take losses to drive out TEF? Let's say div. goes to 0. How much money would they need to pay employees, maintain assets, and pay debt service, and how does that # compare to their normalized EBIT?

gs271
Gs271 - 1 year ago
I think he was trying to point out, that the dividend yield is such, that the company is undervalued. Obv. it is in his interest to drive up the share price, but that's the same for all CEOs, and that's not yet a reason for concern.

My questions:

1) What is their payout ratio?

2) How are their current earnings compared to historical earnings?

I just did a quickie, multiplying P/E * Div yield (Div/P), it seems their payout ratio (using earnings) is beyond 100%? So consider the dividend is slashed to halve its value, that still leaves 6 %, enormous for a Telecom.

But, like you said it depends on their situation & sustainability. To start with, Telefonica is definitely not a lousy company, but if it is a jewel, I really don't know. O2 is a powerful brand with loyal customers all over the world and has big market share.

As you researched the company, can you give us some insights into their financial and operational sitaution? Thanks.

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