Telecoms – are the present dividends sustainable?

With dividend yields of large cap integrated telecom operators in Europe at high single digits, it is worth taking an historical look at the cashflow statements and balance sheets in order to ascertain just how sustainable the present dividends per share maybe.

Stock Mkt Cap Div Yield
Belgacom €7500m 9.7%
Deutsche Telekom €39000m 7.8%
France Telecom €32000m 11.7%
KPN €13200m  9.0%
Telefonica €61.1m 10.6%
Vivendi €19.8m 8.8%

I will be attempting to decide if any of the aforementioned are investible from the point of view of dividend sustainability. Are these dividends stretched, or are the yields the result of low share prices? Intrinsically I dislike telecoms stocks. They always appear good value on cashflow multiples. But they have two traits that I am wary of. Telecoms are highly regulated and appear to be deflationary. I cannot see how either of these are my friend as an investor.

If these are no growth equities, but the dividends are sustainable, then maybe they have a place in a portfolio in lieu of holding  government bonds or bank deposits?


The Belgian integrated telecom operator has one of the highest divided yields in the space.

Stylised Cashflow Statement

% of Sales FCF Statement 2009 2010 Avg.
Net Income 15.3% 19.3% 16.3%
Non Controlling Interest 0.0% 0.3% 0.8%
Depreciation & Amortization 11.9% 12.3% 12.7%
Other Non Cash Charges 1.1% 1.7% 1.4%
Disposal (Gains)/Losses -1.3% -6.7% -2.9%
Op cashflow pre Working Capital 27.0% 26.9% 28.3%
Change In Working Capital -3.2% -1.5% -1.1%
Net Cash Inflow 23.7% 25.4% 27.2%
Capital Expenditure -10.1% -11.2% -11.4%
Free Cashflow 13.7% 14.2% 15.8%
Dividend 11.6% 10.7% 11.4%
Dividend Cover 118.3% 132.8% 139.1%

Over the 6 years of data analysed, there is reasonable stability in Belgacoms cashflow metrics. As long as revenue does not deteriorate dramatically then the dividend would appear to be sustainable on the basis of the cash the the company normally generates.

In terms of the Balance Sheet, I find that at the end of the last fiscal year, the company had debt/equity of 102% with an EBITDA Interest Coverage ratio of slightly under 24x.

At the Q3 stage this year revenue was down 3%, and EBITDA was down 1.6%. Capex was down 3%, but more importantly FCF was down 10%. On an annualized basis this would put cash dividend cover at approximately 1.18x. Ideally ome would wish a higher level of dividend cover in order for the dividend to be able to withstand shocks.

5 year Total Shareholder Return: 3%


Deutsche Telekom

DT has been a bit of a perennial dog since the bust of the TMT bubble. However, each year it cranks out a large dividend that is presently well covered by cashflow.

% of Sales FCF Statement 2009 2010 Average
Net Income 1.4% 3.2% 4.2%
Depreciation & Amortization 21.5% 17.6% 19.3%
Other Non Cash Charges 1.6% 4.5% 0.4%
Disposal (Gains)/Losses 0.0% -0.7% 0.0%
Net Cash Inflow 24.4% 24.6% 23.9%
Capital Expenditure -14.2% -13.9% -15.3%
Free Cashflow 10.2% 10.7% 8.6%
Dividend 6.6% 6.3% 5.9%
Dividend Cover 153.8% 168.1% 144.8%

It is worth noting that cashflow did not cover the dividend during 2006, but the dividend was not cut.

The balance sheet is not as strong as that of Belgacom, with gearing of 248% and interest cover of 7.4x. Now it would appear that DT spends more on Capex on average than Belgacom.

5 year Total Shareholder Return: 4%


France Telecom

In spite of the very high dividend yield at FT, it would appear that recent cashflow generation has been stable and is more than sufficient to cover the dividend payable.

% of Sales FCF Statement 2009 2010 Average
Net Income 7.6% 10.7% 10.0%
Non Controlling Interest 0.0% 0.0% 0.0%
Depreciation & Amortization 15.4% 14.2% 15.3%
Other Non Cash Charges 6.0% 4.8% 4.2%
Disposal (Gains)/Losses 0.0% -2.2% -1.9%
Opcashflow pre Working Capital 29.1% 27.5% 27.6%
Change In Working Capital 2.2% -1.4% 0.5%
Net Cash Inflow 31.2% 26.1% 28.0%
Capital Expenditure -12.2% -13.4% -13.4%
Free Cashflow 19.1% 12.7% 14.7%
Dividend 7.0% 8.1% 7.3%
Dividend Cover 272.2% 155.6% 217.6%

According to the companys outlook statement the goal for the period from 2011-13 is to generate EBITDA of €45bn and spend capec of €18.5bn. These figures are very similar to what occurred from 2007-10. If achieved it should lead to a situation where the dividend is sustainable into the near future. The only thing to scupper this is that EBITDA at the 9 month stage for 2011 is down 5.2% yoy.

 5 year Total Shareholder Return: 2%



% of Sales FCF Statement 2009 2010 Average
Net Income 15.1% 17.3% 15.1%
Non Controlling Interest 0.0% 0.0% 0.0%
Depreciation & Amortization 17.4% 16.7% 18.7%
Other Non Cash Charges -4.5% -6.0% -4.1%
Disposal (Gains)/Losses 0.0% 0.0% 0.0%
Op cashflow pre Working Capital 28.0% 28.0% 29.8%
Change In Working Capital 0.1% 0.6% 0.6%
Net Cash Inflow 28.1% 28.6% 30.4%
Capital Expenditure -13.2% -16.1% -13.1%
Free Cashflow 14.8% 12.5% 17.3%
Dividend 7.7% 8.6% 7.8%
Dividend Cover 192.1% 144.3% 222.0%

FCF dividend cover is reasonably sevure at 1.4 times but has fallen sharply in the past number of years. If capex begins to fall these numbers may improve.

5 year Total Shareholder Return: 23%



Telefonica is one of the largest quoted integrated telecos trading globally. Like many large Spanish companies, it has made a specialism of frequent M&A activity.

% of Sales FCF Statement 2009 2010 Average
EBITDA 39.8% 42.4% 39.7%
Adjustment -9.0% -7.9% -7.2%
Non Cassh Items -2.2% -7.7% -3.2%
Operating cashflow Before Working Capital 28.6% 26.9% 29.3%
Change In Working Capital 0.0% 0.0% 0.0%
Net Cash Inflow 28.6% 26.9% 29.3%
Capital Expenditure -13.4% -14.7% -13.4%
Free Cashflow 15.2% 12.2% 15.8%
Dividend 8.5% 10.3% 9.3%
Dividend Cover 179% 119% 171.7%

5 year Total Shareholder Return: 23%



  • Dividends at the largest European integrated telcoms are presently covered by cashflow,
  • That cashflow coverage is in some cases is well below its average over the past 6 years,
  • If the next five years looks like the last five, then there is no reason for any dividend to be cut,
  • Dividend alone is not sufficient reason to make me want to invest,
  • In many cases operating cashflow and capex is actually reasonably stable,
  • In a low return environment they have just about served their purpose in providing a positive total return, (I would be fearful of their returns in an era of high returns and high inflation).
  • Despite the seemingly FCF yields on offer, I think that it is right that low/no growth regulated firms should trade at such levels.

3 Responses to “Telecoms – are the present dividends sustainable?”

  1. 1 jmcelligott December 15, 2011 at 10:44 am

    This morning, Telefonica have announced a cut to dividend. The company has the lowest 2010 div cover of the stocks that I have reviewed.

  1. 1 Wochenrückblick – Lesenswertes | valueandopportunity Trackback on November 26, 2011 at 8:48 am
  2. 2 Market Musings 28/11/11 « Philip O'Sullivan's Market Musings Trackback on November 28, 2011 at 10:18 am

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