Published January 25, 2023
One constant in the financial media right now is advice on how to invest given the current rate of raging inflation – unlike anything seen in decades – so that one does not fall too far behind financially. Many pundits make it sound easy when in fact that is simply not true. We see this chase of returns relative to inflation as somewhat of a red herring, as it is not so much the investing landscape that should be the top focus, but rather continuing to be prudent in one’s choices of investments.
One stock that pleases Benj’s fancy is Telefonica SA (TEF-NYSE). This Madrid-based telecommunications company serves the European and Latin American markets, with the key countries being Spain, Germany, Britain and Brazil. It has been around for a century, founded in 1924. More recently, it has been profitable every year for the past decade, with revenues over €39-billion ($56.9-billion) last year.
Like many operators in this fiercely competitive industry, it offers a myriad of services. These include mobile, data, internet, fixed telecommunications, video telephone, leasing, handset equipment, fibre optics, web hosting, bit streaming and video/TV. Other operations include financial and other payment security, home insurance, music streaming and loan services. If this all becomes too overwhelming, maybe their online telemedicine is the cure? Yes, this is a big operation.
Revenues in the most recent quarter jumped about 10 per cent year over year to €10.34-billion although profit fell from €706-million to €3.25-million. Competition is a major factor for this decline.
There could be a big boost in the next few quarters as the company considers selling its 50-per-cent ownership position in cellphone mast operator Cornerstone. Vantage Towers, owned by British-based Vodafone, holds the other 50 per cent. Cornerstoneis the largest tower company in Britain, with about 4,200 tower sites. As many of these income streams are tied to inflation, they have become more valuable in recent times. A transaction could help boost the book value of Telefonica from the current level of US$4.50.
Althoughno sector is secure if there is a major recession, telecommunications are a necessity for a well-functioning economy. Certainly, many of these firms will be in a tough place with the increase in interest rates and their often heavy debt loads. Some will likely die or be forced into takeovers at low prices. However, given the metrics at Telefonica, it will likely be among the survivors. Their goal to continue reducing debt is laudable.
Key to future success will be Jose Maria Alvarez-Pallete Lopez, who began his career at British auditing firm Arthur Young in 1987 and joined Telefonica in 1999. He has served in different capacities since then, providing an excellent overview of the operation, taking the helm as chairman and chief executive officer in 2016. He has received a plethora of awards for this work including “Best CEO” in Spain by Forbes Magazine in 2016, and in 2021 Spanish business publication Actualidad Economica named him “Best Businessman of the Year.”
Telefonica typically pays two dividends a year, sometimes with a special one thrown in. It is far less than it used to be, but still remains at a very elevated level, approaching 8 per cent. This could be considered a red flag and should not be glossed over. But the dividend for June has been confirmed at 15 euro cents. The recent win in a tax dispute with the government of €1.32-billion adds more cash to the coffers for payouts and the possibility of an upcoming special dividend.
A little over a decade ago this stock traded at over US$25. in 2014, it crested US$17. The initial sell target selected is US$14.24. It currently trades on Nasdaq at about US$3.90.
Benj Gallander and Ben Stadelmann are co-editors of Contra the Heard Investment Letter