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.
Ticker Name Current Dividend Yield 5 year Dividend Growth 1 year Dividend Growth
TEF Telefonica SA 11.67 23.49 22.69
VOD Vodafone Group PLC 3.68 12.25 60.51
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
Ticker Name Sales Growth (1 year) Sales Growth (5 year) Earnings growth P/E ratio Margins growth Payout ratio Return on Equity Debt to Capital Ratio
TEF Telefonica SA 7.06 3.22 -10.4 4.97 N/A 62.85 44.03 249.88
VOD Vodafone Group PLC 3.18 8.67 N/A 12.23 -4.73 57.71 8.96 N/A
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.
Ticker Name Trend Analysis Price Trading Volume
TEF Telefonica SA 18.08 3912953.25
VOD Vodafone Group PLC 26.41 8264272.5
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.
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)?