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Henry W. Schacht
Henry W. Schacht

Take a French Dip; Long VIVHY, TEF, VOD

May 13, 2011 | About:

Despite the increasing popularity of international investing, most people still turn up their noses at anything that even sounds foreign. Paying 1000x earnings for Netflix is thought to be less risky. No question, many overseas markets have a bit of a Wild West reputation (and for good reason). That said, it is costly to paint every market with this same broad brush.

It isn’t just individuals who shy away from international opportunities, but institutions as well. They’ll buy AT&T (NYSE:T) or Verizon (NYSE:VZ) with hardly a thought, but the mere mention of Telefonica (NYSE:TEF) or Vodafone (NASDAQ:VOD) causes angst, hand-wringing, and sideways glances. Why risk your career on such exotic fare? Europe is a dark and mysterious place, right?

Nonetheless, it isn’t so much a question of fear, but one of laziness, that keeps most firms out of these companies. They aren’t as easy to research. Even foreign companies trading as ADR’s on US exchanges rarely come gift-wrapped. They don’t pop up on many screens (a process that passes for research at many firms). The Bloomberg crutch doesn’t always help either.

Many investors (even those who claim to do in-depth research) rarely stray from the comfort of Wall Street research reports. Foreign stocks often don’t make the cut (ironically) because of a lack of interest. To make matters worse, many firms would rather not have to explain a foreign holding to customers. The phrase, “This is not what our clients want” is a common refrain/excuse. But this begs the questions: Why did the client hire you? And if the client already knows what he/she wants (or does not want), why are they paying someone a fee to “manage” the money?

Remember that old saying that you won’t get fired for buying IBM equipment? The same goes for stocks. It is a measure of many firms’ faith in their clients. You’re too stupid to understand and/or they are too lazy to do the work. After all, it can be hard to stretch your mind to accommodate tickers that are greater than 2 letters long!? Or not.

This attitude leaves plenty of opportunities for those willing to sail into international waters. And as long as I’ve started talking about telecom, let me say that my favorite stock in the group is probably Vivendi (VIVHY), while Telefonica is also in contention.

I’ve written about Vivendi before. At the risk of repeating myself, Vivendi is worth a look by investors. The current stock price shows that the message has clearly not been heard.

Comments from readers of past articles have mostly centered on the fact that Vivendi is based in France, which is actually one of the least remarkable things about this company. The natural insinuation seemed to be that Vivendi’s location trumps any investment appeal. If this was a Chinese firm, these investors would have found a more sympathetic ear.

To get people’s attention, I often mention that Vivendi’s dividend yield is greater than 7%.

Upon hearing this, most investors forget their fears and want to know more. This leads most to their favorite financial website. The trouble is that Marketwatch.com shows an ex-dividend date for Vivendi, but the dividend amount and yield are list as “NA”. This is better than Yahoo & Google Finance. They show nothing at all. So many investors inevitably conclude that my 7% dividend yield is a myth and move on.

But my Vivendi dividend check arrives every year!? And it clears the bank, too! To their credit, Bloomberg.com reports the Vivendi dividend and yield correctly. But that’s about it. Market value? NA.

Is going to the primary source such a novel concept these days? Investors need only go to the Vivendi website (calm down, it’s written in English) to see that the company paid a 1.40 euro annual dividend as of May 5th. This dividend indeed represents a greater than 7% yield.

Also on the corporate website, would-be shareholders can find that Vivendi has 1.25 billion (ordinary) shares outstanding. Each ADR conveniently represents 1 ordinary share. So the ADR price of $27 a share x 1.25 billion shares results in a $34 billion market value. Not bad for a company that generated $3.7 billion in 2010 profits.

This is to say nothing of the positive catalysts like Vivendi’s continuing process to simply its structure and rationalize its businesses.

Speaking of which, Vivendi expects the SFR deal with Vodafone to close by the end of 2Q. Pretty quick, but then again, Vivendi is the controlling shareholder of SFR. They need only delete Vodafone’s address from the shareholder records and stop mailing dividend checks to London.

If Vivendi’s dividend rate isn’t already high enough, there was today’s announcement that Vivendi is targeting an increased dividend for 2011 after the SFR deal closes. For good measure, Vivendi announced that they see 2011 adjusted profit above 3 billion euros after SFR stake buy. It seems CEO Jean-Bernard Lévy is following through on his goals with discipline and an eye toward shareholders. He recently said: “The[se deals] must be done at a reasonable price – we will walk away from expensive deals.”

So far, so good.

Vivendi offers the perfect trifecta – an excellent business, selling at a good price, and a management doing intelligent things with its capital.

Companies with sustainable 7+ percent (and growing) dividends are rare. Don’t ignore this one simply because the check is being mailed from Paris.

Disclosure: Long VIVHY, TEF, VOD.

About the author:

Henry W. Schacht
Henry W. Schacht, CFA is the founder of Schacht Value Investors, an investment management firm serving individuals and institutions. He currently serves as President and Chief Investment Officer. He earned his MBA at the University Of Chicago Graduate School of Business and a BBA in finance from the University of Notre Dame. Mr. Schacht is a member of the Association for Investment Management & Research (AIMR), the Investment Analysts Society of Chicago (IASC), and the National Association of Corporate Directors (NACD).

Rating: 4.2/5 (11 votes)


LwC - 6 years ago    Report SPAM
Thanks once again for an excellent write up. IMO your work is some of the best that I see here on GuruFocus, and which along with a very few other contributors IMO sets a standard that shows the shallowness of what some contributors try to pass off as "analysis".

Hschacht - 6 years ago    Report SPAM
Wow, LWC. Thank you so much. Such comments make it worth writing these pieces.
Power of Incentives
Power of Incentives - 6 years ago    Report SPAM

Nice write-up. I am also a Vivendi shareholder. (France-based, and I too like the 7% yield)

please be complete in your statements: the dividend increase mentioned would be for 2012 and has a couple of prerequisites attached...

also, for accounting reasons, the purchase of vodafone stake in SFR translates for Vivendi into a reduction of equity of more than 6 billion euros.

So higher ROE ahead, but also (much) higher debt/equity ratio and slightly higher P/B. (digestable)

all the best.


Superguru - 5 years ago    Report SPAM
In retrospective SFR deal turned out not as good as sold by management. Management was as usual too bullish. Stock Price is getting hammered due to management's inability to compete with a low cost provider and cutting of dividend.

Any interest in VIVHY still?
Hschacht - 5 years ago    Report SPAM
The company earned 3 billion euros and current market cap is under 18 billion euros. That dividend cut still represents a 7+% yield. So I'll let you decide.
Superguru - 5 years ago    Report SPAM
Researching ViVENDI now, it is getting slightly below book.

Henry Schacht, I agree with LwC that your work is one of the best here in Gurufocus. VIVHY was always on my radar since you wrote this piece. Price has just started to get in attractive value territory.
Hschacht - 5 years ago    Report SPAM
Thank you. I appreciate the vote of confidence. Too bad I was so early on Vivendi.

As for GuruFocus (and other similar sites), I have not written much lately because you seem to be in the minority view. Most are in the quantity over quality camp.

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