With yet another round of firepower launched by the Fed this
week, investors will continue to hunt for yield. In many cases I agree with this approach with
the many high quality dividends that are available from some of the largest
companies in the world. However, when
searching for yield it is important to make sure that the information you are
looking at is accurate. That brings me
to shares of Telefonica (TEF). Many
websites still show this stock trading with a dividend yield. Check that…..a tremendous dividend yield. The problem with these sites posting a
current dividend yield for TEF, is the fact that TEF is currently not paying a
dividend. In Fact, the dividend was
suspended months ago.
I can certainly understand the lure of TEF (especially when
being presented with a dividend yield that does not actually exist). It was hit very hard with the problems in
Europe, and especially within the Spain region.
For those of you that do not know, TEF is the incumbent
fixed-line and wireless telephone operator in Spain and the Czech Republic. It
has the second-most wireless subscribers in the United Kingdom and a big
position in Germany. It has substantial fixed-line and wireless assets in Latin
America, where 66% of its customers reside. However, they provide only 47% of
its revenue and 54% of EBITDA. TEF also owns stakes in Telecom Italia and China
Unicom. I understand the desire to play
a European rebound with TEF. In the AFL
Multi-Cap Value Folio I manage, I did just that. At the close yesterday I decided to take the
16.49% gain after examining TEF’s financials a bit further.
The suspension of the dividend really bothered me as
an investor. When a company generates as
much free cash flow as TEF, they should not have a problem paying a
dividend. I looked at the financials a
bit further and noticed that TEF may have trouble funding short-term
liabilities. Their current
debt-to-equity ratio as of last quarter is 2.62. It has been well over 2 for several
quarters. A high debt/equity ratio
generally means that a company has been aggressive in financing
its growth with debt, and this can result in volatile earnings as a result of
the additional interest expense. Couple
the high debt-to-equity ratio with a very small quick ratio, and it becomes
clearer as to why TEF suspended their current dividend. TEF’s quick ratio has always been below 1 and
as of last quarter it was .68. The quick
ratio measures a company's ability to meet its short-term obligations with its
most liquid assets. The
higher the quick ratio, then the better positioned the company is to meet its
short-term debt obligations. A company with a Quick Ratio of less than
1 cannot currently pay back its current liabilities.
I understand that
these numbers vary by industry. However,
when you look at TEF’s unsuccessful attempts to sell assets in Europe, then it
does shed more light on the suspension of the dividend. Consider the following passage from a recent
analyst at Morningstar who covers the stock:
“While we thought the previously announced continual increases in
the dividend to EUR 1.75 per local share were aggressive, to not only stop the
increases, but to cut the existing dividend makes us question management's
grasp on the firm's ability to generate free cash flow.” I’m not saying that there is not tremendous value
in the shares of TEF. There may be. I am simply encouraging investors to not
simply search for yield without doing further research. If you are using sites that have not updated
their quotes with the suspension of the dividend, then you may buy a stock
simply for the dividend yield, and sadly you will find out there is no
dividend. TEF is obviously worried about
short-term liquidity, and as a shareholder you should be as well.
Jon R. Orcutt, founder of Allocation For Life, is an
asset allocation strategist and author of “Master the Markets with Mutual
Funds: A Common Sense Guide To Investing Success”; Manager/Creator of the AFL
Model Portfolios available for members of Allocation For Life in self-directed
accounts at Folio Investing
http://www.allocationforlife.com/
http://www.allocationforlife.com/
