Date: Feb 13, 2025

By: Benj Gallander

What a wonderful time this has been to make money! Looking at the numbers – or for those graphically inclined, the charts – the past few years have been a period of upward and upward. Of course, there have been some drops to be sure, and some dances sideways, but what do you want, straight up? How boring!

A problem for us is that we, as contrarians, are buying the beaten, the downtrodden – dare we say it, the losers! And that patch has grown thin, with few options. When markets are in the tank, that is our party time on the purchase side. At the moment, there is not much to get excited about.

One thing we will not do at times like this is force the issue, so to speak. We feel no compulsion to buy if bargains are not in our sightlines, nor will we reinvest the money from the huge winners back into the market quickly. Fortunately, enough stocks are in our baskets that our returns can still be accomplished on what we call a substantial amount of money. (Yes, that is relative. Elon Musk would laugh in our direction. Then again, we sometimes hoot in his.)

In January, 2023, we wrote about Madrid-based Telefónica SA TEF-N, then trading around US$3.50. It is up a bit since to US$4.33, but certainly nothing exciting, especially given how well the markets have done.

The company was in major retrenchment mode and was cutting about 3,400 jobs in Spain when our column came out. That has not done enough to boost the stock price, and last month major changes were made in the management ranks. Chief executive officer José María Álvarez-Pallete was shown the door, replaced my Marc Murtra, a former chairman of Indra. Supposedly, major shareholders were clamouring for a transformation, and they got it. Advantageously, Mr. Murtra is close to Pedro Sánchez, the Prime Minister of Spain.

Change does not come cheap in this instance. Mr. Álvarez-Pallete, the main man since 2016, is receiving a US$23.7-million severance package. That huge payout makes us ill. At the same time, it makes us hope that someone will fire us from our investment letter, Contra the Heard.

Telefónica is undergoing radical changes. The largest telecom in Saudi Arabia, STC Group, purchased 9.97 per cent of the shares near the end of last year and is looking to claim a board seat. With that announcement in the books, the Spanish government bought a 10-per-cent stake, while holding company Criteria added shares, pushing its position to 9.99 per cent.

TEF is a myriad of moving parts, and investors who crave more stability would be wise to avoid this company. Its debt load is heavy, at almost US$46-billion, but that is not unusual for telecom stocks. The book value is $3.60 per share, and with the top brass changing, it is likely a major review is in the offing, leading to writedowns and knocking down this valuation.

Meanwhile, Mr. Murtra will face his first test almost immediately, trying to sell the company’s 40-per-cent interest in a broadband unit it owns with Zegona Communications. A price pushing US$1-billion is not out of the question. Apparently there are already four majors interested in the asset, and a bidding war is not out of the question.

Competition in Spain is stiff, with majors such as Vodafone España and Yoigo both looking to increase market share. Fast-growing Masmovil is also in the mix. Not to be ignored is Orange Espagne. We own Orange, the parent of the latter company, but it has not been a profitable investment, trading near where we bought it in 2012. It, too, pays a hefty dividend, currently around 7.4 per cent.

We do not expect the stock price of Telefónicato rebound strongly to north of US$30, where it has traded in the past, but our sell target of US$12.24 seems achievable. Worth noting is that the firm has not traded at that level for about a decade.

TEF is a complex enterprise in a complex sector, making it easy to mask fundamental improvements in the business. As such, the stock could move quickly once analysts and investors finally recognize the changes. We have seen rapid price appreciation after a period of stagnation many times before; very little is linear in the stock market.

Meanwhile, the fat dividend of around 8 per cent will hopefully be collected. That is a high payout, to be sure, and there is a risk of it being cut, as it has been in the past. We do find that companies that have already slashed dividends are definite candidates to do it again. If that happens, the stock price will almost assuredly fall.

So yes, this outfit has many red flags, more than a normal Benj stock. But he is willing to sit back and ride out the storms, as the potential reward seems quite uplifting. But even though it is a telecom, and they are often viewed as pretty safe havens, this corporation is not for the faint of heart.