How Safe Are Your International Telecom Dividends?

Telecoms are a popular place for dividend investors, and for good reason: It's not uncommon for companies to throw off a yield over 4%. Sometimes, however, stateside investors get caught off guard when their international company slashes -- or (gasp!) eliminates -- its dividend. Such was the case with Partner Communications (Nasdaq: PTNR  ) , an Israeli telecom that eliminated its dividend back in August.

So I thought I'd go in search of other dividend-paying telecoms from abroad and investigate how healthy their companies are.

Measuring sustainability
A dividend's payout ratio is one of the most popular ways to measure its sustainability. In the most basic sense, this metric gives you the percentage of a company's profit that it's paying out in dividends. You want your fair share as a stockholder, but you also don't want the company giving out more than it takes in.

Let's look at six telecom stocks, their current yield, and their payout ratio.

Company

Dividend Yield

Payout Ratio

Telefonica (NYSE: TEF  ) 8.5% 182%
Cellcom Israel (NYSE: CEL  ) 10.4% 83%
France Telecom (NYSE: FTE  ) 8.3% 61%
Vodafone (Nasdaq: VOD  ) 6.7% 54%
New Zealand Telecom (NYSE: NZT  ) 9.8% 157%

Source: Yahoo! Finance.

France Telecom, Vodafone, and Cellcom Israel's dividends are safe. Generally, it's good to find a stock whose payout ratio is below 80%, so even Cellcom Israel is close to the safety zone.

In the case of Telefonica and New Zealand Telecom, however, the outlook seems much murkier.

Safer than they seem
This is where things get tricky. If you have earnings on paper, that doesn't mean you have it in the bank. Things like accounts receivable and payable, depreciation, and goodwill are included in earnings -- and they don't immediately affect the amount of money a company has.

There is, thankfully, a way to see how much money a company has put in the bank: free cash flow. In the end, dividends are paid from free cash flow, not from earnings.

Check out the free cash flow payout ratio for these companies, and the story changes considerably. These numbers show how much free cash was used to pay out dividends in 2010.

Company

FCF Payout Ratio

Telefonica 81% 
Cellcom Israel 68% 
France Telecom 58% 
Vodafone 46%*
New Zealand Telecom 73%*

Source: SEC filings.
*FY 2011 numbers.

Clearly, this changes things in a big way. All of the companies look like they have much more sustainable dividends, as they all fall below the 80% threshold (for now, we'll say that Telefonica is close enough).

This isn't to say, however, that these dividend rates will never change. Because foreign companies file a 20-F with the SEC only once per year, it can be more difficult to get a grasp on how things are going throughout a calendar year.

Payouts can show much more variability with some foreign companies than domestic investors might be used to. Cellcom Israel, for example, paid out $0.84 per share (converted to USD) back in June, but that payout came down to $0.67 in October. We see that same type of irregularity with France Telecom, which paid out $1.17 back in June and followed that up with a dividend of $0.85 in August.

In short, many of these companies are willing to adjust dividend payouts based on economic performance, rather than do everything they can to maintain steady payouts throughout a calendar year, as many U.S. companies do. New Zealand Telecom, for instance, says that its goal is "to target a payout ratio of approximately 90% of adjusted earnings." So when times are good, the payout goes up; when they're not, the inverse occurs.

Clearly, investing in these international companies requires a great deal of attention. If you want to stay up to date on all the latest dividend news with these companies, I strongly urge you to add them to your watchlist today.

A few more excellent dividend ideas
If you're looking for a few more dividend-paying stocks that our analysts think will have no problem sustaining their payouts, I suggest you check out our newest special free report: "Secure Your Future With 11 Rock-Solid Dividends." Inside the report, you'll get the names of stocks our analysts hand-picked for their dividend-paying fortitude. The report is yours today, absolutely free.

Fool contributor Brian Stoffel owns no shares in any of the companies mentioned. You can follow him on Twitter at @TMFStoffel. The Motley Fool owns shares of Telefonica. Motley Fool newsletter services have recommended buying shares of France Telecom, Cellcom Israel, and Vodafone Group. 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.


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