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Chandan Dubey
Chandan Dubey
Articles (150) 

Stay Away from the IBEX

May 16, 2012 | About:

I read the article “Why Spain Might Be the Best Place to Invest Now” and decided to put it in my “to research” list.

The article made a very simple and easy-to-understand point, and it can be explained by a very simple graph below.


The projected return of the Spanish market for future years is more than 17.5%. This is based on an economic growth of about 4% a year, a dividend yield of 6% and a valuation reverted to the mean of 7.5%. It is very likely that the Spanish economy may not be able to grow 4% a year in the next decade, but the high dividend yield of its stocks and lowest valuation may reward patient investors.

The point plays quite well from a value investing perspective. Given the set of problems with euro and the high employment in Spain, anything related to Spain is being doubly punished. With such a wide sell-off in the market, there are bound to be some good deals around.

Instead of just blindly buying the whole index of the blue chip stocks in Spain, called IBEX 35 (see the Wikipedia article), It is strongly advisable to look at the individual companies. After all, an index is as good as the stocks in it. After only a brief glance some surprising things come to light (dividend yield based on the price of the stock on May 11, 2012, index weights based on 1 Jan 2011).

CompanySectorDividendEx div dateIndex weightingDebt/Equity
TelefonicaTelecommunications12.71%Nov 7, 201120.67%3.14
Banco SantanderBanks11.95%Apr 13, 201219.03%-
BBVABanks7.85%Apr 16, 20129.86%-
IberdrolaElectricity and gas9.42%Jul 13, 20119.16%1.01
Repsol YPFPetrol7.83%Jan 10, 20127.57%0.98
InditexFashion2.62%May 2, 20125.43%0.00
AbertisCar parks and motorways11.12%Apr 12, 20122.32%3
ACSConstruction14.86%Feb 7, 20122.14%4.97
Gas naturalElectricity and gas7.9%Jan 9, 20121.88%1.65

Our task is made easier here because almost 80% of the weight is in only nine of the stocks, as listed above. One more thing that jumps out is that the dividend yield is quite high for these companies, but they have mostly paid the dividends for this year and you will need to wait at least six months to get them (except Iberdrola which pays in July).

Let us look at these companies in a bit more detail. We are looking for a few things:

  • A good balance sheet. This is very desirable given that Spain and Europe is going through so much.
  • A very good margin of safety. If we are going to invest there, it must offer us a tantalizing deal.
  • A business which we can understand. If we don’t understand the business then the second point is moot, as we will not be able to judge what the margin of safety is.

Telefonica SA

Some of the worrying things about Telefonica (TEF) are as follows:

  • The company has €66 billion in debt. The company pays €2 billion in interest every year. The interest seems to be well covered though, given that the company makes a lot of money.
  • The current market cap is €49 billion. The FCF has been quite stable at around €8.4 billion. With a €66 billion in debt and €6 billion in cash the EV is more than 109 billion. This gives us a EV/FCF of 13 which is not very cheap. Compare this with France Telecom.
  • The company’s intangibles plus goodwill is on a uptick and has gone from €36.4 billion in 2007 to €53 billion! Compare this with the total assets of Telefonica which is €129.6 billion and equity of €21.6 billion. The tangible book value is negative €32 billion!

The company has some fantastic opportunities and growth in Latin America, which is thrown around a lot as something to buy Telefonica for. As far as the balance sheet of the company goes, it is quite ugly. From an income and growth perspective the company is quite desirable.

Banco Santander and BBVA

Given that these two are banks, I will be hard pressed to judge them on any of the three points.


This is a utility company, and a debt-to-equity ratio of 1 is not that bad for a company in this industry. The company is cheap on almost all metrics, and the dividend seems quite sustainable. The company has a very predictable customer base and revenue. This investment might end up being a very good value, if the current downtrend goes on for while.


Repsol YPF (REP)

The company should be renamed to Repsol because YPF was forcefully nationalized by the Argentinian government. On a valuation basis I do not see it as a better deal than BP or Total. Given the seizing of YPF is at least worth $10 billion to Repsol the drop from the 52-week high of €10.4 billion, this seems like a overreaction from the market. The problem is that Repsol is going to have a hard time getting the money back from Argentina. It has filed a case against the country in New York and this is going to go through a long and arduous process. The company might end up being a great deal at this price, but there is a lot of risk with this investment at the moment.


The company owns a lot of well-known brands like Massimo Dutti, Zara, Pull and Bear, etc. The majority of the stores are company owned and the company has no debt. This is one of the companies I will gladly buy. Let us look at the figures which the company has managed to pull off.


The problem is that the company is not cheap. The P/E is 22 and the stock has largely survived the drop in the Spanish market.


Abertis Infrastructures

Abertis has too much debt, with nearly €13 billion in debt, €393 million in cash and €3 billion in equity. The company has €15.4 billion in goodwill and intangibles. I hesitate investing in this stock because of this issue.


Again, too much debt.

Gas Natural (EGAS)

The company distributes gas and LNG. It also generates and sells electricity in the Iberian peninsula. The company has P/E of 7 and dividend yield of 8.45%. The company looks quite cheap, but I pause at the high debt/equity of 1.65. I would rather buy GDF Suez which is in a similar business, has debt to equity of 0.89, and dividend yield of 9.21%.


So, if you look at the IBEX, you can probably find one business which satisfies all of our basic requirements of an understandable business with good balance sheet and attractive margin of safety. This is no reason to invest in the whole index, even after such a huge drop in the stock market. Although if you can analyze the banks (BBVA and Santander) and find them attractive, you will probably not buy the index anyway.

About the author:

Chandan Dubey
I invest because I want to be free by the time I reach 40 years of age i.e., 2025. My investment style is to find a small number of bets with large margins of safety. I pay a lot of attention to management and their incentive. Ideally, I like to buy owner operator businesses. I am fortunate to have a strong inclination towards studying. I aid my financial understanding by extensive reading in psychology, economic, social sciences etc.

Rating: 4.4/5 (29 votes)


Cornelius Chan
Cornelius Chan - 5 years ago    Report SPAM
Again a sensible and helpful piece of stock market research from Chandan Dubey.

As Benjamin Graham wrote in the Introduction chapter of The Intelligent Investor:

“The determining trait of the enterprising investor is his willingness to devote time and care to the selection of securities that are both sound and more attractive than the average. Over many decades, an enterprising investor of this sort could expect a worthwhile reward for his extra skill and effort in the form of a better average return than that realized by the passive investor.”

From a "back-of-the-napkin" analysis, I agree with your conclusions - especially of the banks.

Emilucho premium member - 5 years ago
You missed the best: REE ENG and maybe BME.

Wide moat, recurring earnings, low debt, plenty of cash, and

most of its earnings are regulated (except BME). Take a look at them if you


Maybe you could find a bit riskier REE because of spanish electrical

rate deficit. But according to what the goverment has published, it wont be so


Cdubey - 5 years ago    Report SPAM
@Emilucho: The point of the article is to stay away from the IBEX35 index. REE makes 1.39% of the index and BME makes 0.46%.

REE has debt-to-equity of 2.47. It has 20m cash, 4.7b in debt and 1.8b in equity. You are right about wide moat and earnings, but the balance sheet is not ideal. I don't know where you found the plenty of cash and low debt part. See here for the balance sheet.

BME, you might be right about that. Looks like a good company in a good business. I might have to look at the management though.
Fkattan - 5 years ago    Report SPAM

Thank you for this article.

I have a question about how did you compute FCF in the EV/FCF metric.



Cdubey - 5 years ago    Report SPAM
@Fkattan: I looked at the cash flow statement of the company. I took the operating cash flow, which was €17,483m and took out the payments on the PPE figure which is €9,085m. This is the amount TEF needs to continue running its business. I did not take out the spending of €2,948m on the acquired companies. This gets me a figure of €8.4 billion.

A different way to calculate it gives something entirely different.

Capex=Change in total assets - Change in total liabilities

Change in total assets = -€132m (from balance sheet 2011)

Change in total liabilities = €4,149m (from balance sheet 2011)

Capex= -€4,281m



One has to decide which makes more sense. I would vote for the first one. If you think like an owner of this business, then this is the money you can use for investing in new business+dividends+loan payments ... etc.
Ebravo77 - 5 years ago    Report SPAM
C Dubey

I think you are not looking at

a) whether a lot of this debt is long-term in nature

b) where the debt is located. In Telfonica's case a lot of this debt is at the level of its LatAm subs so liabilities and cashflows are matched here. If the structure is Parent level debt taken out against the LatAm subs then this would be more worrying. If anything the shareholding structure of Telfonica is more of a concern given how dividends are disbursed and increasing.

c) in Repsol's case had the market not fully discounted the Argentine event given the NAV the company was/is trading at?

d) When you say you are buying the index i assume you are talking about buying an index fund that would track the market but as the index changes so would the ETF

Buying the index as a basket of these individual stocks to buy and hold without rebalancing is a different proposition from buying an ETF that rebalances due to its structure.

As hairy as the banking/real estate/sovereign crisis is are you not being compensated for this given the index trades at around a 5x hussman PER or a trailing 8 or 9x PER, 0.8x PBR? Yes, PBR and Hussan PERs may be distorted by the index weighting towards banks but the these are also about two standard deviations below their twenty year averages, which implies a reasonable margin of safety.

All one needs is for things to go from horrific to pretty bad and the market to re-rate to, let's say, one standard deviation below its long term average for there to be significant potential upside.

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