Today, I will take a deeper look at two telecommunications stocks; both foreign companies that can easily be traded in the US. On the surface, these stocks both look very attractive, but if you have been looking at our monthly top dividend rankings, you will have noticed that Frontier Communications (FTR), the leader in recent months, has still turned out to be a very poor investment. Why do Telefonica (TEF) and Vodafone (VOD) not appear in our list? Simply because they are not included in the S&P500 index. I will certainly try to include more of these names in future weeks. If you have not done so already, I highly recommend that you sign up for free newsletter which focuses on dividend investing/passive income.

Back to our two stocks. As you will see, they have a few points in common but also big differences, I thought it would still be interesting to compare the two. Today, I will take a look at these stocks and do my best to determine if they are sustainable dividend stocks (check out our Ultimate Sustainable Dividend Portfolio) but also using the top 20 things we look at to judge dividend stocks.

Dividend Metrics

Vodafone (VOD)

Telefonica (TEF)

I think it’s fair to say that Telefonica’s dividend metrics are extremely impressive. The company has been paying out dividends for 8 years or so and has been steadily increasing its payout since then. A dividend yield of almost 12% that is increasing by 20% or so per year seems too good to be true and I think it’s fair to agree on one thing: the growth will not keep up at this pace. That being said, if Telefonica can even keep up its high dividend, it might be a solid play.

Now let’s take a look at Vodafone, which has been much more inconsistent in its payout with dividends increasing and decreasing. The current dividend yield is very impressive as is the growth. If you forget how great the Telefonica yield looks, Vodafone looks very impressive.

Can these companies keep this up? Let’s find out

Company Metrics

Let’s start off with Telefonica (TEF) which has been increasing sales almost every year but earnings per share have not been doing as well. A bad last quarter has resulted in a lot of lost confidence explaining how the stock currently trades at a P/E of 5 or so. Certainly reminds me of Research in Motion (RIMM) which also trades at similar ratios. The payout ratio is still very reasonable but it seems clear that many investors are worried about Telefonica. Why? A good start would be the debt to common equity ratio of 250%..!!! Suddenly, that 12% yield is looking a lot less attractive….

Vodafone has stronger sales growth over 5 years and while its earnings have been very unstable, the company is profitable and seems to be doing a lot better. Its debt to assets ratio of 25.36% is much more reasonable and healthy and the P/E ratio of 12.2 seems gives me much more confidence. Vodafone can also afford to pay out its dividend, as its payout ratio remains fairly low.

Stock Metrics

Industry Metrics

There is no doubt that it’s very tricky to buy stocks in this sector. Not only is the competition very high but the capital costs involved are also very significant. In fact, in many ways it reminds me of the airline industry although probably not as bad. Both companies are significant players in multiple markets. As if things were not already challenging, the economic context is very tricky, especially for Telefonica in the very depressed Spanish economy.

Both are huge players and are unlikely to lose much market share but gains are also very difficult to come by given the competition. They are both also involved in emerging countries with less competition but even those have their challenges as the margins are even lower.

Sustainability

As much as I’d like to own a 12% dividend yield stock in a high quality dividend portfolio, I don’t think Telefonica makes the cut,, it is simply too difficult to predict where the company will end up being a few months from now. That being said, I love Vodafone’s profile and think that it could easily be part of a growth dividend portfolio. More than others though, its situation would need to be monitored closely given the sector in which it operates and how quickly things can change.

What Are Your Thoughts on Vodafone (VOD) and Telefonica (TEF)?

I’ve heard it several times. The best way to find a stock is to look around you, find a company that you deal with in every day life and depending on your opinion of that company, the service that you get and other such things, you might just find a great investment. Why? Because you will own a company that you know a lot about. I’m not a big believer in that argument. Knowing a company is important, but there is little relationship between how well a company treats me and where it’s stock is headed. You’d like to think that there is, but it’s just not true.

A few years ago, I had every man’s dream come true. Through friends of friends, I met an incredible women that I became friends with before eventually starting to date her. To make a long story short, one thing led to another and after a few years, I was ready to commit. As is usually the case, two main things that were missing for me were:

-Buying an engagement ring!!
-My wife actually saying yes:)

In order to get the first part done, I ended up shopping in quite a few physical locations but when the time came to buy, I trusted Blue Nile (NILE), a company I had heard good things about the company and was able to find exactly what I was looking for. The service, communications and actual ring were all beyond expectations and she ended up loving the ring and saying yes:)

Since my wife’s family is Japanese, being able to communicate better with her family and to eventually help our kids learn to speak was very important for me. I did end up looking into quite a few programs and ideas but in the end I settled on using Rosetta Stone which I have been using ever since. It’s not easy and there are many different ways to get it done but for me, Rosetta Stone (RST) has been amazing. It’s not perfect but has helped me a great deal and I would highly recommend the service. I’m not saying that I’m fluent (very far from it, but I am improving!).

Great Company Does Not Mean Great Investment!

If you have looked at our past long and short tech trades, you have seen that I have been short both of these names. In fact, I shorted Blue Nile (NILE) 4 times this year alone and all trades were winning ones and once on Rosetta Stone (RST) which also turned out well. I did not go long these names at all. In fact, I have probably been more negative about Blue Nile than any other company on this blog.

Why Has Blue Nile Been Such A Great Stock To Short?

Every time I’ve traded NILE, it has been based on valuations. I always look at NILE’s P/E ratio and for some reason, it is always being priced as if the company was a high growth company.  Just take a look at how Blue Nile has been trading in terms of P/E when you compare to its growth which has been unspectacular.

With such P/E ratios, you would expect very impressive growth right?… Wrong:

Nice growth… but compare the same charts for a company like Apple (AAPL) which we have been long very often (not always successful but most of the time it has been!)

Nothing can explain such a huge discrepancy in my opinion.The main thing that seems to happen is for analysts and investors to consistently anticipate growth to pick up. It might happen at some point but it just seems like despite the fact that Blue Nile is the leader in the online jewelry sector, its brand has not been strong enough to get a large number of buyers to make such a purchase online. Many people shop for big purchases like rings, cars and houses online but how many actually close the deal online? A lot less than you could think and that will likely remain a long term obstacle to Blue Nile’s growth.

Since NILE announced earnings after hours, this chart looks better than it really is. NILE was trading at $41.50 after hours… will update the chart later on.

What About Rosetta Stone (RST)?

Rosetta Stone has a strong product and seems to be able to do well with its users but it seems to depend so much on its advertising budget that it puts a severe limit on both revenue growth and earnings. If a huge proportion of buyers are purchased through ads that end up being very expensive, the only way to increase revenue growth is to increase marketing spending which hurts the margins while cutting down on marketing spending could help profits but would likely put pressure on growth. It’s actually a similar story to Groupon (GRPN) in my opinion. The stock has been in free fall with no stop in sight.

Obviously I have been wrong on other names, even though 2011 has been an incredible year in terms of returns. But for these 2 cases, even though I like the companies, I can’t imagine and never considered going long on these names, if anyone is a stockholder and/or a believer in these stocks, I would love to hear your bull case. I do understand that at some point their valuations will become attractive but right now, those charts and numbers look depressing. If you would like to read more of our thoughts about tech stocks, we have a free newsletter sent every 2 weeks or so, sign up here:

 Disclosure: No positions on NILE or RST

We’ve discussed a few times how putting Larry Page back in charge at Google was a sign of big things to come. It wasn’t (and still isn’t) clear how things will turn out but the chances of Google remaining passive in all of its wars was slim. If you think about it, Google’s 2 main opponents are Facebook and Apple. As the web becomes more social, Google’s absence from the social web was clearly a danger and has become an obsession for Page. Thus, he put a lot of effort, time and resources into the recent launch of Google+. It’s still unclear how that will end up but what is clear is that the product is as good as Google could have hoped for and at least gives the company a shot at social.

The second big rivalry that Google has is in mobile. As users around the world start connecting in different ways, being a force in rival is critical to Google’s future and thanks to its Android operating system, Google is in great shape. In fact, Android is the top o/s for smartphones and gaining market share every month. There are still threats though:

-Handset: Google is competing for control of mobile mainly with Microsoft and Apple. The difference between Google and those 2 had been that they also controlled handsets (Microsoft-Nokia while Apple builds it own). That gives them a huge advantage in the distribution of their products and more control over how the handsets evolve over time in order to to be better integrated with software developments.

-Patents: It’s a hot topic in Silicon Valley and in the mobile space these days. Companies are suing each other for infringement of patent use to a degree never seen before. It’s become such a problem that the best way to defend themselves is often to threaten to make counter lawsuits. The only way to do that of course is to own patents and for that reason, companies have been eager to buy them. The recent auction for Nortel’s patents was a huge loss for Google which lost to a consortium led by Apple and Microsoft.

What It Acquired?

By buying Motorola for $12 billion, Google not only made its biggest acquisition ever (almost 4 times bigger than the Doubleclick one) but it became a new player in the handset industry. Google had tried different things without much success but buying Motorola gives Google access to its phones, distribution networks but also Motorola’s huge patent collection. That will serve as a deterrent to companies that are currently coming after Google’s Android.

Did Google pay too much?

Google (GOOG) ended up paying a 63% premium for Motorola, an incredible premium and one that certainly leaves many of us with questions. Could Google have made this purchase by paying significantly less? The word is that there were several bidders for Motorola including Microsoft (MSFT). Avoiding going the hostile route by having the support of Motorola’s management was important and it seems like the price to pay was going to be much higher than what the market had priced for Motorola’s holdings. The big part that seemed to be underpriced was the patents. Because of the announcement, Research in Motion (RIMM) saw a huge jump in its stock price as rumors picked up that it could be bought next.

Bold move

There is no doubt that this move looks like a Larry Page led idea. He was a big part of the decision to buy Android a few years ago and Motorola seems to have been the next logical step. No matter how much money Google does have, a $12 billion acquisition will certainly qualify as a bold move, espeially since it is so far away from Google’s core, software oriented activities. Will the move pay off? It’s difficult to say, especially with so much of it being the patents, that impact will be very difficult to quantify.

Another component that will be interesting to see is how handset companies such as Samsung that currently use Android will react and if they will be tempted to move away from Android now that it directly competes with them through Motorola.

Expanding The Google World

We have discussed the notion of “interface” and how well Apple controls its own. Google had a great grip through its Android software that makes it easier to get user data and have a leader position in short, ad display, applications, etc. Thanks to this acquisition, Google now also has control over at least some of the handsets which will certainly help. Google will have a significant presence in almost all spheres of users.

What Is Next?

I think the only real step missing here is for Google to acquire an ISP (internet service provider) which would make it much easier for Google to connect users, to have a better control over what handset they end up using, getting users connected to faster connections which would enable them to do much more. That is certainly a possibility. Google has placed bids on the past on airwaves and has also been working on projects to provide very fast internet connectivity. It has been providing a free wifi in some areas but also had run a contest to introduce very high speed internet to an American city, that project should be up and running in a few months.

We had discussed Pandora a few weeks ago after the company turned public and one of my biggest doubts surrounded the fact that the company had yet to turn a profit, did not expect to turn one in the near future and its revenues were honestly not that impressive. I can tell you one thing: I did not change my mind.

Musc Industry = Airline Industry?

Before I go further, I just want to clarify. I’m not talking about the actual artists, I think those live in a very different environment but one that offers as much if not more potential. Pandora does not produce original music though, it distributes music through its website, mobile apps, etc. I would consider companies like Spotify, Sirius and even Apple (through Itunes) all be part of this market.

Apple Used To Have All The Power

Even 4 or 5 years ago, as music started being consumed digitally and consumers started moving away from buying the actual physical cd’s, Apple was the master of digital music at that time. Why? Through its devices such as the Iphone and the Ipod, most consumers were choosing to buy music in the easiest way; through Itunes. Buying music from elsewhere and trying to import it to an Ipod is not that complicated in most cases but why go for a complex solution when Itunes offered such a convenient one. It was a great opportunity for Apple but a terrible one for the music industry. Why? They had no pricing power. If Apple wanted songs to be sold for $0.99, labels could either accept or not be available on iTunes which was THE store. It was ideal for Apple.

Then Came Apps

When Apple decided to make apps a big part of iTunes and of what its devices would be about, that created incredible opportunities and revenue streams but also caused Apple to lose its grip on the labels. Why? Because while it’s still convenient to buy through iTunes, there are a growing number of apps that offer similar or better deals and as players like Pandora and Sirius move to other platforms, Apple has certainly lost some of its negotiations power. It was still a great move by Apple overall even though it killed its near monopoly (that would have evaporated eventually anyway). How does this new world look like? Labels basically sell rights to selling their songs to dozens of players such as Pandora, Spotify, Amazon, Google Music, Sirius, etc. They are buying different types of rights but the end result is simple in my opinion: Power has shifted

Labels Regain (Some) Control

If you are a label negotiating for the rights to Katy Perry’s music, don’t you think that all of these players want to have those songs on their offerings? Of course. Even if you increase your price a bit, they are likely to cave in as they try to battle each other for users. As time goes by, there seem to be an increasing number of high profile players which is great for users such as myself and also great for music labels. It is not great for music distribution companies and unless there are many consolidations (unlikely at this point), it will be very difficult for a company like Pandora to truly gain momentum. In many ways, I compare it to the airline industry where passengers have power while the overcapacity of the industry has left airlines unable to generate profits for their shareholders for decades. It’s depressing when I think that Pandora could be stuck in a similar issue.

Pandora Isn’t The Average Music Company

It’s true that Pandora offers many different aspects that have made it so popular and while some others such as Spotify (unlimited music) and iTunes (convenience) also stand out, Pandora remains a unique and very interesting company. Will that help the company be profitable though? Looking at airlines around the world, I tend to think that it will not be enough no.

How Pandora Could Get Around This

If Pandora was able to transform itself into something more than a music service, it could potentially find a way out but I’m not even sure that would be a good idea or that it could work. I would certainly not consider it likely that Pandora could pull something like this off.

While I am not trading Pandora right away, I am certainly leaning towards shorting the stock following this analysis

Forget for a few minutes that Apple does not currently pay out any dividends and that it is hoarding cash like no other company has ever done. At some point, stockholders will succeed in convincing management that some of that money needs to be paid out to investors. Why? Because those cash reserves are already incredibly high and mounting every single day with no end in sight. It’s not as if Apple was declining, had some negative return projects that required massive investments or anything of that type. As Apple currently starts looking for new management in case Steve Jobs is unable to return, the possibility of Apple starting to pay out a dividend has certainly increased in the past few years.

Would Apple Automatically Become A Dividend “Must Have”?

I know, if Apple started paying out dividends, it would be at least 25 years away from becoming a dividend aristocrat, would have no history and would have a difficult time being judged for at least 5 of the 20 things that we look for in dividend stocks. Could it be considered a sustainable dividend stock? That would also be a difficult case to make given how quickly Apple became the tech giant that it is, can we really assume that it will remain so for 20, 30 or even 40 years?

Every Rule Has An Exception

I think that in this case Apple would warrant an exception and could be considered a great dividend portfolio holding. Why? Here are the top 10 reasons why:

1-Bringing In Cash Like No Other Company: How many companies do you own that have this much earning power? Apple could easily live off of just one of its hit products but has several high margin businesses that bring in cash flows every day. That cash could easily start being paid out to shareholders.

2-Residual Income: Apple is able to generate “residual sales” as a very large part of its consumers end up upgrading their products every few years. As Apple is able to release new generations of its products every year, that translates into very solid revenues and earnings that can be counted on. The stability in cash flows that this brings is very valuable for dividend investors.

3-Solid Balance Sheet: I tweeted that Apple had enough cash to buy Goldman Sachs (GS), LinkedIn (LNKD) and Twitter, I think that gives a very good idea of just how much reserves the company has. Even if it started off by paying a few billions in annual dividends, it could keep that payout for decades without even worrying about its debt ratio.

4-High Growth: Because of Apple’s size and its name, many assume that this is a slow growth company. That would be innacurate. The company has been increasing its sales and profits by double digits for several years and does not show any sign of slowing down. Will it remain so for decades? That seems impossible. But even a few more years will make Apple an even greater force. This natural growth would translate into dividend growth as well.

5-Lots of Upside Potential: It’s easy to forget that Apple still has a lot of markets to enter. There are strong rumors that Apple will enter the TV market in the next 2-3 years, it will continue to gain market share in the tablet as well as increase sales of smartphones. Another area of growth is the growing presence of Apple in China where it has several hunded of millions potential consumers.

6-Stable Company: We are often led to believe that without Steve Jobs, Apple would be nowhere. While he has been the force for inspiration and innovation, I think it’s important to also see how well the Apple machine has been working. It delivers hundreds of millions of high quality products, on time and has been able to

7-Limited Competition: A few years ago, developing a tablet device or a smartphone was all about hardware but with the explosion of apps and their increased importance, it seems as though only Android powered devices can truly compete with Apple in most of its markets and while that is solid competition, having only the two of them is a great environment for Apple.

8-Attractive Valuation: As I debated when I last traded on Apple, I find it incredible that the stock remains so cheap. It seems too good to be true and it usually is when everyone agrees which is currently the case (virtually all analysts have a buy or strong buy rating on Apple) but I still believe that it is the case.

9-Lots of momentum: While this is not a deciding factor, the fact that Apple’s stock has been doing so well translates into a very strong trend analysis score which certainly indicates that it is a good time to buy Apple.

10-Low Payout ratio: This might be somewhat speculative but if we expect that Apple would start at a 1% dividend yield or so, that would mean a dividend of $4 per share or so per year. That would translate into a payout ratio well under 20%, an excellent one by any standard.

So I throw the question back to all of you dividend investors: If tomorrow morning Apple announced the initiation of a dividend, would you jump on board?

Disclosure: Long Apple (AAPL)

Wow, who would have thought? In the past few years, Google had grown increasingly scared and maybe even paranoid about Facebook, its growing power and how it would end up impacting Google. When Larry Page decided to get back in charge of the company, he made it very clear that social was his #1 priority, and that the success of the company would largely be viewed on its success in social. We knew that Google was working on some type of solution but that was nothing new given all of the recent product launches (Orkut, Wave, etc). All of those had failed miserably so there was little confidence in the fact that Google could come up with a good product. Most Google believers thought that at some point the company would cave in and acquire a player such as Twitter. How successful has Google+’s launch been? It has already gained 20M members within a few weeks, much faster than any other social product.

-Why it matters

So why did the company become obsessed with Facebook and with social in general? How did it become so critical? There are many different reasons but I think these were mostly defensive reasons. Google currently more or less controls the web. Users from around the world connect to the web and go through Google as their initial destination. Why? Because Google can help them find specific products and since it crawls the web, it it the best way to find anything that you could be looking for. Or it used to be. As users have started using Facebook, the way the web is used has started changing. If users are sharing links and information with their social network and that those networks are closed to crawlers such as Google, it’s safe to say that the web is becoming a much more closed place. That not only makes Google less useful but also takes away to some extent its central role. If Facebook knows users, what they like, who they know, what they’re doing, etc… more than Google, it could become better at targetting ads and a better platform for advertisers. That is what Google has been trying to avoid.

-How Facebook screwed up (apps)

To many, including yours truly, it seemed (and still does seem) as if Facebook facing any type of competition was extremely unlikely at best. Why? There are many hurdles for anyone even considering building a large and broad social network with any type of reach comparable to Facebook. All of that being said, Facebook did make a few mistakes that have helped Google have a shot. For example, Facebook has been unable to efficiently manage privacy issues and the fact that few people want to share the same items and photos with their college friends as they do with their family and co-workers. Another huge gap that is difficult to understand is Facebook’s slowness in releasing apps for the exploding mobile scene. How is it that the top social network still to this day does not have a functional Ipad app? It’s a major mistake and one that Google seems to be going after.

-Spectacular Start

To be sure, Google+ has seen an incredible excitement towards its products and the 20 million users that have already signed up are probably well beyond Google’s hopes when the launch was made. Perhaps even more impressive is the fact that there have been no public mistakes or errors despite all of the quick growth. Almost all critics agree that Google+ is a great product and has at least a shot at competing with Facebook.

-It’s Still An Uphill Battle

All of that being said, those calling Google+ a Facebook alternative and a success already are too early. Reaching 20M users is impressive but when you are simply using current Google users and signing them up after an easy 2 minute sign-up, that does not necessarily equal commitment. I’d be curious to hear how much time those users are spending on Google+. I’m one of those members and while I did sign up, I’ve never spent more than a couple of minutes on the network simply because at this point there is little going on among my friends and contacts. That could very well change but getting members to rebuild their network on Google+ when it exists and works well on Facebook will not be easy to pull off.

-Both Can Coexist

I think that one of the most overlooked things is that both could and probably will co-exist. Google+ is not a Facebook killer as Twitter isn’t. They are likely to have many of the same users and those will simply have one more website to visit. I don’t see a day for now where users start quitting Facebook to stay on Google+. It could happen but nothing indicates that it will at this point.If that occurs and Google+ becomes one of the “main social networks”, I think the initiative will have to be considered a major success. It was an uphill battle and Google seems to have a shot which is incredibly in itself.

-Benefits

What type of benefits can Google hope and count on if Google+ success keeps up? I would expect the main one to be for Google to remain at the center of the web and get an even greater understanding of its users, what they like, what they are interested in, etc. This will also help Google offer more customized offerings to its users both on the web, through Chrome, Android, apps, etc. It will also fit well within the strategy of offering voice and video chats, interactions with friends and family, etc. One other great benefit would be to gain a deeper integration of advertisers. Facebook gains so much through the presence of those brands that build Facebook pages, produces content, interacts with fans and even pays advertising dollars to promote their Facebook pages. There is incredible upside at little to no cost for Facebook and I expect Google to try to get a piece of that pie as it tries to offer the most complete advertising offerings available.

What are your thoughts on Google’s social strategy and its chances against Facebook?