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Europe Phone-Company Yields May Beat Ireland, Portugal Bonds

Dividend yields for European telephone companies may give investors a higher payout than benchmark bonds from Ireland and Portugal after a week-long decline in telecommunications shares.

Dividend yields based on projected payouts at current market prices rose to a record at Telekom Austria AG (TKA), Deutsche Telekom AG (DTE) and Telefonica SA (TEF), according to data collected by Bloomberg. Investors in former phone monopolies in Austria and France would see yields of more than 10 percent. That compares with 10-year Irish and Portuguese bonds yielding 9.1 percent and 9.9 percent respectively. AT&T Inc. (T) in the U.S. yields 6 percent.

The world’s biggest market drop since 2008 may have opened up buying opportunities for investors seeking high dividends. Phone companies were once known as widow-and-orphan stocks because they offered safe payouts bolstered by high cash flows.

“In very uncertain times like the current ones the telecom industry is kind of a haven for investors,” said Peter Braendle, who helps manage 57 billion Swiss francs ($79 billion) at Zurich-based Swisscanto Asset Management. “These days everybody looks closely at telecoms because they have recurrent earnings and it’s a defensive investment.”

European telecom services companies are yielding 6.7 percent based on projected dividend payouts, according to Bloomberg data. In the U.S., where the S&P 500 this week fell the most since December 2008, the dividend yields of telecommunications companies are 3 percent.

Cash Flow

“The worst is probably priced in for European telecoms,” Robin Bienenstock, a London-based analyst at Sanford C. Bernstein Ltd., said yesterday. “I’d be surprised if dividend yields further increase. Dividends for most European telecoms are very well covered with cash flows.”

Shares of Telefonica, Europe’s second-largest phone company, have lost 10 percent since July 27, while France Telecom, France’s largest phone company, lost 9 percent.

European companies may face more difficulty in meeting dividend goals because of more intense competition and stricter regulation, said Roger Appleyard, head of global credit research at RBC Capital Markets in London.

“The headwinds that European telecoms are facing are as a whole much tougher” than those faced by U.S. operators, Appleyard said. “Equity investors have serious doubts and a lot of skepticism about the ability of European telecoms to generate strong cash flows, whereas there’s less skepticism about the American telecom model.”

Increasing Dividends

Telecom Italia, with a 6.9 percent dividend yield, has forecast 15 percent annual payout increases through 2013. Telefonica, which lifted its dividend 14 percent this year to 1.60 euros a share, has forecast a 1.75 euro payout in 2012.

Deutsche Telekom rose 2.3 percent to 9.64 euros at 2:51 p.m. in Frankfurt trading. France Telecom climbed 0.2 percent to 12.93 euros in Paris, while Telekom Austria gained 0.5 percent to 7.38 euros in Vienna. Telefonica fell 0.7 percent to 14.05 euros in Madrid.

To contact the reporter on this story: Jonathan Tirone in Vienna at jtirone@bloomberg.net

To contact the editor responsible for this story: James Hertling at jhertling@bloomberg.net

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