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Is This Telecom Dividend About to Vanish?

Telefonica (NYSE: TEF  ) , Europe's second-largest telecommunications company in terms of market capitalization, shocked industry watchers by posting a third-quarter loss that was double what analysts expected. The Spanish telecom lost $590 million instead of the forecast $293 million. This was the first red ink for the company in nine years.

Telefonica gave three reasons for its unwelcome news:

  • A restructuring charge of $3.7 billion for its decision to lay off 6,500 workers (20% of its workforce) by 2013.
  • A mobile phone price war in Spain reducing annual revenue per unit, or ARPU (sales dropped 8.8%).
  • The weak Spanish economic environment. Spain has the highest unemployment rate of the European countries, 22.6%.

Some good news
Things would have been much worse if not for Telefonica's money-making Latin American operations, which provide almost half of the company's total revenues. Sales in that region grew by 18% over the previous quarter. But the company shouldn't expect that steep growth to last much longer. The wireless penetration in Latin America is becoming saturated, currently at 106%.

And there is another threat to Telefonica's Latin American operations. Because of a high inflation rate, Argentina has imposed strict currency restrictions it hopes will curtail dollars and euros leaving the country. Those regulations may prevent foreign companies -- such as Telefonica, which owns Telefonica de Argentina -- from removing any profits or dividends from the country.

Speaking of dividends
High and steady dividend yields are what draw investors to telecom stocks. But the yields from our domestic telecom giants, AT&T's (NYSE: T  ) 5.9% and Verizon's (NYSE: VZ  ) 5.4%, though quite decent, just don't measure up to the yields from Telefonica and other foreign telecoms. For example, Telefonica's current yield is 11.3%, France Telecom's (NYSE: FTE  ) is also 11.3%, Cellcom Israel's (NYSE: CEL  ) is 16.6%, and Telecom Argentina (NYSE: TEO  ) yields 8.4%.

Telefonica is well aware of the importance of its high dividend, and is loathe to suspend, or even reduce, it. So it seems to be ignoring its own earnings statement -- and bleak projections for the Spanish economy -- insisting it will pay a $2.40 dividend per share next year, which will also be the minimum dividend going forward.

But analysts wonder how, with the continuing economic problems, stringent financial measures, and tightened budgets, the company can manage to still deliver that kind of shareholder payout. One analyst told Reuters: "It's shocking they haven't lowered their [dividend] guidance."

Telefonica has been a strong earner for years and a favorite of dividend investors. It will be a worthwhile investment to keep a close watch on. Use the links below to put Telefonica and any of the other companies mentioned in this article on your stock watchlist:

Fool contributor Dan Radovsky owns shares of AT&T. The Motley Fool owns shares of Telefonica. Motley Fool newsletter services have recommended buying shares of France Telecom and Cellcom Israel. 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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