I initiated a position in Telefonica on Thursday at a price of USD 61.50.
Telefonica, together with its subsidiaries and investees operates in the telecommunications, media and contact center industries. Telefonica basic purpose is the provision of all manner of public or private telecommunications services, including ancillary or complementary telecommunications services or related services.
The Company operates in three business areas: Telefonica Spain, Telefonica Latin America and Telefonica Europe
Essentially Telefonica is the third largest telecommunications company in the world behind AT&T and Vodafone.
Withholding Taxes on dividends
The size of the position is not big.
My main intention is to see how the dividend payments gets affected by withholding taxes. Particularly, it may get quite complex for a Singaporean holding a Foreign ADR on the US Stock exchange.
The main question is will I get double taxed (First by a 20-25% withholding tax from Spain for a US ADR then secondly a 30% withholding tax from US as a alien to USA)
I am using DBS Vickers so dividend handling charges is nil.
The end result is that my dividend yield could be really small. The current div yield listed at USD 62 is 8%.
A 30% US withholding tax will bring the current yield to 5.6%. If there is another withholding tax from Spain it could be much lesser.
Telefonica as a dividend stock
Investigating Starhub, M1 Limited and Singtel makes me understand a lot about telecommunication companies going forward.
I gain a lot of insight into mobile communications and fixed line communications and the impact of 3G and LTE via Telco 2.0.
The coming wave changes the business economics of telcos particularly those heavy on mobile communications.
The end result is that in the developed markets, the telcos will find it difficult to increase their revenues or ARPU (average revenue per user) and that their cost on infrastructure will increase due to high data usage caused by all-you-can-eat unlimited data plans. [Read manifesto to find out more >]
The size of the company for me gives it a competitive advantage going forward. We saw how M1 Limited and Starhub struggled against the incumbent Singtel.
The incumbent is able to seriously spread the cost of marketing, capital expenditure, something the smaller telcos cannot do. They are able to undercut their competitors and eliminate switching cost better due to their larger capital base.
They are also able to partner popular handset manufacturers. Their sheer size enables them to have some buyer’s power over their suppliers.
Global subscriber base
Although their stock was affected badly as they generate earnings in Euros, less than 50% of their revenue comes from Spain.
Here is a table showing its subscriber base (both wired and wireless). Click to view larger image
Although due to its size its able to spread out cost, fighting a business battle on different fronts requires more capital expenditure in certain developing areas as well.
Right now, although I did say large size gives them power, their revenue is declining in Spain due to competition.
They are trying to make up for it via their biggest overseas revenue driver in Brazil.
Fundamentals [View Google Spread Sheet here >]
In terms of fundamentals Telefonica current trades at an EV/EBITDA of 9 times operating cashflow.
That is quite high compared to the rest of the european telcos but not the highest.
Fundamentally, it paid out 4.8 billion in dividends in 2009. Free Cashflow have been relatively maintained at 8.8 billion. This means that essentially it has the capability of paying out much more than 4.8 billion in dividends and still do not need to tap the debt market.
The management intends to hike the dividend payout further. Dividend payout have increase from 3.1 billion in 2006 to 4.8 billion in 2009.
If you checked my google spreadsheet you will realise that dividend payout have increase but free cashflow, operating cashflow and net income have not.
This likely means that dividend payout ratio have been increasing but not the earnings which have been stagnating. In my opinion this might not be a good sign.
Telefonica is in a downtrend. Prices are closer to the 52 week low rather than the 52 week high. Clear signs of it making lower highs and deeper lows.
Price broke a resistance form by the lower peaks but prices are still far away from the 200day moving average.
In terms of price factoring in fundamentals and technicals, it offers a good place to build a position.
I will only add more if the fundamentals and the price moves higher. I know we should buy things cheap but I am basing a lot on technicals here. A move up towards 65 only for it to fail and make a lower low towards 55 is a clear sign of Telefonica continuing its downtrend.
Telefonica after so much negativity have the potential to stage a turnaround and move up above the 200day moving average and stayed above.
If it doesn’t I am likely to sit around if it stays above 55. .