1 Dwindling Dividend to Rule Them All


France Telecom (NYS: FTE) reported earnings today, and officially waved goodbye to its double-digit dividends. Is this the first sign of the telecom company's ultimate demise, or a strategic decision to free up funds for global growth?

Number crunching
Sales fell to 10.8 billion euros for Q3 2012, 3.5% less than last year's third quarter. EBITDA dropped 7.3% to 3.9 billion euros, putting the company's profit margin at 34%.

Its operating cash flow dropped from 9 billion euros to 8 billion euros, and the company expects its 2013 cash to fall another billion. It's got its sights set on 2014, though, and predicts savings strategies and easing regulation to grow operating cash flow two years from now.

France, currently responsible for half of the company's revenue, saw sales drop 5.4%. This is the steepest decline of any country, and stands in sharp contrast to France Telecom's Africa and Middle East divisions. Combined, these two regions increased sales by 4.3% and accounted for around 10% of the company's overall sales.

Its user base increased 3.1% to 227 million customers worldwide. The company enjoys 94% ownership of Egyptian mobile phone company Mobinil, where 700,000 new contracts accounted for more than double France's growth. Its broadband subscribers bumped up 4.1% to 14.8 million, and its digital TV subscriptions jumped 17.5% to 5.87 million

Dividend doomsday
France Telecom's CEO recently announced his intention to drastically cut dividends and, prior to today's announcement, the company's site stated that its new dividend policy will limit dividend payouts to 40% to 45% of operating cash flow.

Still, the announcement today that the company will slice and dice its 11.3% yield by as much as 40% will undoubtedly leave some investors with a sour taste in their mouths. France Telecom's new dividend model is similar to Verizon's (NYS: VZ) , which currently yields 4.6% and has comparable debt ratios and margins to France Telecom.

But dividends don't magically appear. They are earnings that the company doesn't have anything to do with -- and France Telecom has plenty to do. It's got $42 billion in debt, faces increased domestic competition from the likes of Vodafone (NAS: VOD) and Iliad, and is continually expanding its international presence.

The company's dividend woes are not unique. Spanish Telecom Telefonica (NYS: TEF) recently took drastic measures to curb its $72 billion debt. In August, the company cut its double-digit dividend completely to rake in an extra $12 billion.

Increased competition is also hurting margins, and telecom holding company VimpleCom (NYS: VIP) will need to seriously reconsider its 13.2% dividend as it grapples with a negative 8% operating margin.

France Telecom historically enjoys some of the highest margins around, and its 8 billion euros in cash gives it some wiggle room to reinvest without loading up on untenable debt. Its cap ex for the first nine months of 2012 clocked in at 3.7 billion euros, just over 10% of its revenue.

Valuation station
So is France Telecom going to turn into a cash cow in the next quarter? Probably not. The eurozone crisis will continue to weigh on this company, but I'm bullish on its long-term prospects. For some perspective, check out the company's valuation compared to its industry:


France Telecom

Foreign Telecom Services (industry average)







Price-to-Free-Cash-Flow (most recent quarterly)



Source: Yahoo! Finance.

With the dividend cut, France Telecom is taking an important step to reorient its investments, and the real ace up its sleeve is its international growth opportunities. I've invested real money in France Telecom and am looking forward to reaping a reasonably sized dividend while I wait for its strategic international placements to really take off.

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The article 1 Dwindling Dividend to Rule Them All originally appeared on Fool.com.

Justin Loiseau owns shares of France Telecom and a cell phone. You can follow him on Twitter, @TMFJLo, and on Motley Fool CAPS, @TMFJLo.The Motley Fool owns shares of France Telecom. Motley Fool newsletter services recommend France Telecom and Vodafone Group. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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