Value and income investors would like to see the business growing over time keep generating free cash flow to its shareholders and paying the dividends out to shareholders consistently over the years. Of course, those dividends should be paid out from the source of generated earnings and cash flows, not from the source which should be reinvested back into the business to maintain its competitive advantage. On the search for big dividend yields, I found one telecom company in Israel called Cellcom Israel (CEL, Financial). Since 2007 of the public offering, CEL has consistent paid out the dividends and with the current price of $15.7 per share, the dividend yields more than 18%.
CEL is the provider of cellular communication services in Israel. It offers a range of services through its cellular networks including basic and advanced cellular content and data services. As of fiscal year 2010, CEL offers international roaming services in 179 countries. Currently, CEL got nearly 3.4 billion subscribers, including basic cellular telephony services as well as the value-added ones. In Israel, CEL can be considered the largest provider in the country and the estimated market share based on the number of subscribers is around 34%, whereas the next 04 competitors take 32%, 29% and 4.3 % for Partners, Pelephone and MIRS respectively. In the breakdown of the revenue for the year 2010, the voice services took the greatest part with nearly 70% of its total revenue, including outgoing air time (45%), incoming airtime (18%) and roaming (6.6%). The next big contribution to revenue was content and value added services, accounting for 10.5%, the rest was others with fixed monthly subscription fees, extended warranty fees, transmission services, landline services... of 8.3%. For the customers segment, individual segment is the greater pie of around 72-73%, whereas business is around 25%. Normally when people use cell phones and other communication services, the post paid are more loyal then the pre-paid. And for CEL’s business, the big part of the revenue was coming from post-paid, taking around 87-88% of the total revenue, suggesting the more sustainable revenue sources than the pre-paid focus models.
For the last 05 years, CEL has been gradually growing its top line, operating income and the net income. In 2006, it got 1.46 billion in revenue, $255 million in operating income and $134 million in net income. And as of fiscal 2010, its revenue has grown to $1.74 billion, operating income was $506 million and net income stayed at $337 million. And since 2007, the return on equity is in the triple figures, ranging from 150% to more than 350%. The high return on equity has been due to the substantial financial leverage ranging from 7 times to nearly 30 times currently. On invested capital (taking into account of debts employed), the return was consistent from 20-27%. In addition, CEL has generated the consistent growing operating cash flow and free cash flow as well. As of the end of 2010, it has got $621 million in operating cash flow and nearly $460 million in free cash flow.
As predicted, the balance sheet was highly leveraged, the D/A is as high as 97%, including nearly 64% of the total assets was financed by long-term debt, 8% was financed by short-term one. So although the market capitalization was only $1.56 billion, adjusting the cash and its total interest bearing debts, the total enterprise value of CEL got up to more than $2.8 billion. With these debts, the main maturity year is in 2017, with the total face value of $840 million. With 05 series of debts, the series A would due in next year, with the face value of only $123.5 million, series C would be due in 2013, with the face value of $47 million. From Series A to series D is linked to the changes in inflation, measured by CPI, only series E is unlinked.
So with the current operating cash flow of $621 million, and it would be predicted to keep growing over time, the sound to be big debts burden is not so worrisome for CEL. Besides, it has kept paying the dividends out of its earnings and cash flows, from $1.78 in 2007 per shares to $2.89 in 2010. However, looking from the macro level, the government regulations seem tougher for telecom business. The recent new government rules on limitations on prices that providers can charge customers would decrease the cost of connectivity per minute by 70%, reduce the text message prices by around 95%, restraints on the exit fees for cancelling services. That would inversely impact the performance of CEL in the future. However, to be the leader position in the growing industry in the emerging economy, I think CEL would continue to further experience the decent performance over the long-term period. Combined with the willingness to paying out the majority of earnings as dividends, the shareholders would be better off with the rich dividend yields at the current price.
This is the subjective viewpoint of the author, and it is not the recommendation to buy, hold or sell the stocks mentioned in this analysis. Anyone who wishes to buy, hold or sell the stocks has to do his/her own analysis at his/her own risk
CEL is the provider of cellular communication services in Israel. It offers a range of services through its cellular networks including basic and advanced cellular content and data services. As of fiscal year 2010, CEL offers international roaming services in 179 countries. Currently, CEL got nearly 3.4 billion subscribers, including basic cellular telephony services as well as the value-added ones. In Israel, CEL can be considered the largest provider in the country and the estimated market share based on the number of subscribers is around 34%, whereas the next 04 competitors take 32%, 29% and 4.3 % for Partners, Pelephone and MIRS respectively. In the breakdown of the revenue for the year 2010, the voice services took the greatest part with nearly 70% of its total revenue, including outgoing air time (45%), incoming airtime (18%) and roaming (6.6%). The next big contribution to revenue was content and value added services, accounting for 10.5%, the rest was others with fixed monthly subscription fees, extended warranty fees, transmission services, landline services... of 8.3%. For the customers segment, individual segment is the greater pie of around 72-73%, whereas business is around 25%. Normally when people use cell phones and other communication services, the post paid are more loyal then the pre-paid. And for CEL’s business, the big part of the revenue was coming from post-paid, taking around 87-88% of the total revenue, suggesting the more sustainable revenue sources than the pre-paid focus models.
For the last 05 years, CEL has been gradually growing its top line, operating income and the net income. In 2006, it got 1.46 billion in revenue, $255 million in operating income and $134 million in net income. And as of fiscal 2010, its revenue has grown to $1.74 billion, operating income was $506 million and net income stayed at $337 million. And since 2007, the return on equity is in the triple figures, ranging from 150% to more than 350%. The high return on equity has been due to the substantial financial leverage ranging from 7 times to nearly 30 times currently. On invested capital (taking into account of debts employed), the return was consistent from 20-27%. In addition, CEL has generated the consistent growing operating cash flow and free cash flow as well. As of the end of 2010, it has got $621 million in operating cash flow and nearly $460 million in free cash flow.
As predicted, the balance sheet was highly leveraged, the D/A is as high as 97%, including nearly 64% of the total assets was financed by long-term debt, 8% was financed by short-term one. So although the market capitalization was only $1.56 billion, adjusting the cash and its total interest bearing debts, the total enterprise value of CEL got up to more than $2.8 billion. With these debts, the main maturity year is in 2017, with the total face value of $840 million. With 05 series of debts, the series A would due in next year, with the face value of only $123.5 million, series C would be due in 2013, with the face value of $47 million. From Series A to series D is linked to the changes in inflation, measured by CPI, only series E is unlinked.
So with the current operating cash flow of $621 million, and it would be predicted to keep growing over time, the sound to be big debts burden is not so worrisome for CEL. Besides, it has kept paying the dividends out of its earnings and cash flows, from $1.78 in 2007 per shares to $2.89 in 2010. However, looking from the macro level, the government regulations seem tougher for telecom business. The recent new government rules on limitations on prices that providers can charge customers would decrease the cost of connectivity per minute by 70%, reduce the text message prices by around 95%, restraints on the exit fees for cancelling services. That would inversely impact the performance of CEL in the future. However, to be the leader position in the growing industry in the emerging economy, I think CEL would continue to further experience the decent performance over the long-term period. Combined with the willingness to paying out the majority of earnings as dividends, the shareholders would be better off with the rich dividend yields at the current price.
This is the subjective viewpoint of the author, and it is not the recommendation to buy, hold or sell the stocks mentioned in this analysis. Anyone who wishes to buy, hold or sell the stocks has to do his/her own analysis at his/her own risk
