This Telecom Dividend Could Get Crushed

Before you go, we thought you'd like these...
Before you go close icon

Telecom Argentina (NYS: TEO) reported some strong third-quarter numbers, with net profit up 36% over the same period last year. And with a payout ratio of 42%, Telecom Argentina can easily afford its massive dividend.

But unfortunately, the nation of Argentina is doing its best to sow doubt as to the abilities of its country's businesses to pay foreign investors those dividends owed them. This has come about through currency restrictions it imposed last week. One of those regulations forces individuals and businesses to seek permission to buy dollars. This is in response to U.S. dollars fleeing the country, $9.8 billion in the first half of this year alone.

With Argentine inflation running between 20% and 25% annually, citizens are worried the government will rush a devaluation of its currency, and they don't want to be stuck with weak pesos. This has caused local speculation that the government will prevent companies like Telecom Argentina from sending money overseas, including dividends and profits.

Don't call for me, Argentina
Telecom Argentina held a press conference Thursday to try to dispel that notion. CEO Franco Bertone said, "We don't have problems making dividend payments. I don't expect restrictions in this sense."

Drastic currency measures, which could prevent a company's dividends and profits from leaving the country, wouldn't necessarily stop with Argentine companies. A foreign company such as Telefonica (NYS: TEF) , the Spanish telecom that owns the other major Argentine carrier, Telefonica de Argentina, could also be affected. Telefonica's current dividend yield of 10.9% would then certainly be hit.

Economic volatility is certainly no stranger to Argentina. Its currency was devalued after high levels of inflation in the early 2000s, and Argentine watchers are getting nervous about the country's large amount of foreign debt. A further decline of the peso will only make it more difficult to pay off that debt.

Several other international telecoms with attractive dividend yields have become particularly popular investments in this era of pitiful yields. France Telecom (NYS: FTE) yields 11.2%, Cellcom Israel (NYS: CEL) yields 16.1%, City Telecom (NAS: CTEL) yields 7.5%, and Vodafone Group (NAS: VOD) yields 5.2%.

But investors in those companies -- and other foreign companies as well -- need to look at more than bottom lines, dividends, and whether a company can afford to pay out those dividends. It is still important to keep a finger on the pulse of the economic stability of the country in which those companies operate.

Telecom is supposed to be a relatively stable business sector. But when sovereign economic volatility enters the picture, investors should prepare for what may be a bumpy ride.

A good way to keep tabs on the above companies is by placing them on My Watchlist:

At the time this article was published Fool contributorDan Radovskyhas no financial interest in any of the above-mentioned companies. The Motley Fool owns shares of Telefonica.Motley Fool newsletter serviceshave recommended buying shares of Vodafone Group, France Telecom, and Cellcom Israel. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

Copyright © 1995 - 2011 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

Read Full Story

Want more news like this?

Sign up for Finance Report by AOL and get everything from business news to personal finance tips delivered directly to your inbox daily!

Subscribe to our other newsletters

Emails may offer personalized content or ads. Learn more. You may unsubscribe any time.

From Our Partners