1 June 2009
Dear Fellow Investor
This
investment idea is an unlikely company for me to recommend.
It
is large, with a utility like business and growth is limited and may
even be slightly negative this year.
As
with a lot of the companies on my watch list I started getting
interested after the price fell substantially against the market.
It
is also one of the companies selected for my Dogs of Europe portfolio
2009 comprising of the 10 highest dividend paying shares in Europe
and the UK.
The company is Deutsche Telekom (“DT”)
Action
|
Maximum purchase price: |
EUR 8.50 |
|
Suggested portfolio
Weighting |
3% |
|
Stop Loss* |
20% |
*
Stop loss value means the percentage loss when the share should be
sold from your portfolio to limit losses
Company
Description
Deutsche
Telekom AG is an integrated telecommunications provider offering its
customers around the world a portfolio of services in the areas of
telecommunications and information technology (IT).
The
Company operates in five business segments: Mobile Communications
Europe, Mobile Communications United States, Broadband/Fixed Network,
Business Customers, and Group Headquarters and Shared Services.
The
Company’s mobile communications business comprises two separate
segments: Mobile Communications Europe and Mobile Communications
United States, collectively referred to as T-Mobile.
Key figures
|
Location |
Germany |
|
Currency |
EUR |
|
Current Price (29.05.2009
Frankfurt exchange) |
8.21 |
|
Security No. (ISIN) |
DE0005557508 |
|
Market Capitalisation |
35,501 million |
|
Debt to Equity |
1.16 (YE Dec
08) |
|
Price to Earnings ratio |
24.5 |
|
Price to Free Cash Flow |
6 |
|
Dividend Yield |
9.40% |
|
Year End |
December |
The
Idea
This
decline turned DT into an undervalued defensive share with an
attractive dividend yield of slightly over 9%.
DT
became the first big European Telecom operator to issue a profit
warning this year and that just eight weeks after saying it would
repeat its 2008 earnings performance in 2009.
In
the profit warning DT said it expects to generate €18.7bn to
€19.1bn of adjusted earnings before interest, tax, depreciation and
amortisation (EBITDA) in 2009. In February, it said it would generate
€19.5bn.
This
profit warning of a 2 to 4% decline in EBITDA caused the share to
drop 10% to an all time low, even slightly below the low after the
bursting of the internet bubble in September 2002.
The
share price decline was overdone compared to the relatively small
decline in operating profit. Considering the current recession it is
to be expected that the use of mobile and business phones will
decline.
Why
did the share price react so strongly?
-
The
announcement was unexpected
-
It
cast doubt on the defensive qualities of Telecom shares in general
-
It
cast doubts on the specific performance of DT
Negative
arguments:
Positive
arguments:
Summary
and Conclusion
DT
is an attractive investment based on its defensive business, high
dividend yield, solid financial position and high free cash flow
generation.
As
mentioned in a previous newsletter I am very sceptical about the
current bear market rally and thus want to focus on strong, stable,
dividend paying investments.
Disclosure
I have currently sold put
options on DT. This was done to possibly receive the shares at a
lower price should the option be exercised, while earning income from
the option premium in the meantime. The options expire on 17 July
2009.
Additional Reading
Regards
Tim du Toit
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P.S. A media company in the wrong country at the wrong time...
This month the company I found for subscribers is located in France.
In terms of the size of companies I look at its quite large with a market value of €1,72 billion.
The company owns the most popular television channel in one of the largest European countries but is also very active in new media channels including the internet, tablets and smart phones.
In spite of this, the market views it as an old media company that is soon going the way of the dinosaurs. However, when you look at its financial statements you will see what a great business it is.
Its balance sheet is solid with no debt, and it generates a high amount of free cash flow and profits. This enables it to pay a dividend of just under 7% that can easily be maintained and has room to increase.
When I recommended the company it was trading at 7 times free cash flow, 7,7 times 2010 earnings and 5,6 times EBIT to enterprise value.
I am sure you will agree this is undervalued.
To immediately get your hands on this value investment idea (for as little as €39) click here.
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