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2012 Preview: Telefonica

With 2011 nearly in the books, it's time to reflect on what has transpired this year and what companies could be facing business-altering decisions in 2012. On today's plate, we have the Europe's largest telecommunications provider, Telefonica (NYSE: TEF  ) .

But before we dig too deeply into what 2012 may have to offer, let's get a quick snapshot at how 2011 treated shareholders:

Year-to-Date Stock Return (17.7%)
Price-to-Earnings (TTM) 14.5
Price-to-Sales (TTM) 0.9
Cash/Debt $7.3 billion / $80 billion
Projected 5-Year Growth Rate (0.9%)
Forward P/E 7.8

Source: Yahoo! Finance. TTM = trailing 12 months.

Given the dicey sovereign debt situation currently facing most of Europe, it shouldn't come as a surprise to anyone that Telefonica ended the year lower. In fact, with Portugal succumbing to rising lending rates and both Spain and Italy's lending rates vacillating wildly during the year, it's astonishing that Telefonica didn't lose more than it did. But these results are now in the past. Let's look ahead and see what could be driving Telefonica's stock price in 2012.

What to expect
2011 marked a major restructuring of Telefonica's business model, which will continue well into 2012. The company has been busy aligning its digital businesses all under one unit and is attempting to move far away from its traditional landline business, which is no longer profitable in some cases. Last quarter marked the first time in nine years that Telefonica reported a loss that the company blamed on an 8.8% drop in revenue in Spain, which accounts for a quarter of the company's revenue. Nobody ever said transitioning into digital was going to be easy, and Telefonica is figuring this out firsthand.

Another trend that could continue is Telefonica's falling dividend. Once seen as one of the highest-yielding dividends in Europe -- rivaling that of France Telecom (NYSE: FTE  ) , Portugal Telecom (NYSE: PT  ) and crushing Vodafone's (Nasdaq: VOD  ) yield -- Telefonica's need to retain cash in light of its highly levered balance sheet could prove costly to income-seekers in the upcoming year.

I'd also look for the company to focus its efforts on Latin America, which is one of the few regions currently exhibiting stability in growth. Still early in its development, Latin American revenue popped 18% in the company's most recent quarter. Mobile and text revenue have also been a rare bright spot and should remain a secondary focus in 2012.

Foolish roundup
Perhaps the biggest question mark heading into the new year is whether Europe's woes will again be a strain on the company's stock  -- and unfortunately, I'd have to guess yes. With austerity measures across much of Europe ready to kick in, that puts much of Telefonica's revenue stream at risk of contraction. While the company may look inexpensive now, it could even get cheaper. My advice would be to not let the company's dividend lure you into buying, but to instead look domestically for dividend-paying telecoms such as AT&T (NYSE: T  ) and Verizon (NYSE: VZ  ) , which still offer a solid dividend and considerably more stability than nearly any telecom in Europe.

What are your thoughts on Telefonica heading into 2012? Share them in the comments section below, and consider adding Telefonica to your free and personalized watchlist to keep track of the latest news with the company.

Also, if you're looking for better dividend plays headed into the new year, consider downloading a copy of our latest free special report, "Secure Your Future With 11 Rock-Solid Dividend Stocks." You can access your complimentary copy today at no cost! Just click here to discover the winners we've picked.

Fool contributor Sean Williams has no material interest in any companies mentioned in this article. He is embarrassed to admit that he still has a landline. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong. The Motley Fool owns shares of Telefonica. Motley Fool newsletter services have recommended buying shares of France Telecom and Vodafone. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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 that has its readers' best interests on speed dial.

Read/Post Comments (1) | Recommend This Article (11)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 30, 2011, at 12:30 PM, vaderblue wrote:

    Long on PT. Great price. Great dividend.

    Looking for a turn in price in late 2012.

    I believe PT will do well in the long run.

    Salaries and wages are 40% higher and even though subscriptons have dropped dramatically they appeal geograhically in a well populated area in Portugal. Cash they have, so patience is a virtue and the price is right. Riding this stock

    all the way. Be a Warren Buffet and believe in your stock. Make some money on dividends now

    and reap capital appreciation in the long run.

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