In an environment of low interest rates and artificially low bond yields, we have been recommending a number of high dividend stocks at cheap valuations to replace bond portfolios.
This is one of the most attractive TELECOM plays in the universe, an overlooked company but with huge potential according to analysts who usually do their maths.
We had started accumulating it in our MODEL PORTFOLIO over the summer but are now reaching compelling BUY levels
Buy Telefonica S.A. TEF SM @ EUR 2.85
Telefónica, S.A. is a Spanish multinational telecommunications company headquartered in Madrid, Spain. It is one of the largest telephone operators and mobile network providersin the world. It provides fixed and mobile telephony, broadband and subscription television, operating in Europe and the Americas.
As well as the Telefónica brand, it also trades as Movistar, O2 and Vivo.
It is the largest fibre network operator in Europe and Latin America, serves 337 million customers in 14 countries directly and 170 countries through partnerships.
The company is a component of the Euro Stoxx 50 stock market index.
The company was created in Madrid in 1924 as Compañía Telefónica Nacional de España (CTNE) with ITT as one of its major shareholders.
In 1945, the state acquired by law a share of 79.6% of the company. This stake was diluted by a capital increase in 1967. Until the liberalisation of the telecom market in 1997, Telefónica was the only telephone operator in Spain it still holds a dominant position .
Since the acquisition and merger of O2 in 2014, Telefonica Germany is the largest German operator by number of customers.
Like most telecom operators, Telefonica has been plagued by declining revenues and profits due to cut throat competition in Europe and in Latin America. Its dominant position in Argentina also cut into its revenues and profits due to the sharp devaluation of the Argentinian Peso in 2019.
However, the trough has been seen and Telefonica stands to be a major beneficiary of the Brazilian recovery as well as added value services in Europe with te deployment of 5G and its leading position asa finer optic operator.
Revenues are set to stabilise in 2020 and profits to grow again in 2021 with EPS growing by 19 % that year and a strong recovery in 2022.
Telefonica stock price fell from 20 in 2007 to 2.80 today, despite stable revenues and profits over the period, leaving the company extremely undervalued
The company pays 14 % dividend and has strong free cash flow, meaning that the dividend is not at risk. Its Price to sales ration of 0.3 is also very low historically.
Its earnings yields of 13 % makes it one of the cheapest telecom companies available today in the world.
The company trades at historically low Price to Sales and Price to free cash flow.
Analysts have been revising up their ratings as well as their target prices. What is most interesting is that the two analysts that work on models and forensic analysis Alpha Value and MorningStar have price targets at respectively EUR 6.91 at EUR 8.70 published in the past 10 days.
Although we have not reached a clear technical bottom yet, we feel that the two upgrades of the past 10 days and the high 14 % dividend yield are making it an extremely compelling and high yielding long-term investment .
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