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A regular American homebody might think of France Telecom (NYSE: FTE ) as just another European phone service. But if your passport gets stamped once in a while, you'll probably recognize the company's nearly global Orange brand of wireless services. France Telecom also happens to have a truly mouthwatering dividend policy, currently yielding 12.7% annually. This is not only an official Income Investor recommendation, but also the only stock in my own portfolio where the investment thesis was almost entirely dividend-based.
So if you love dividends, international smartphone sales, or both, you should perk up your ears when the company reports fourth-quarter earnings this week. Let's see what we might expect from this report.
The word on the Street
The average analyst expects normalized fourth-quarter earnings of $0.41 per American depositary receipt, assuming France Telecom can deliver about $14.8 billion in sales. That would be down from $0.43 per ADR and $15.7 billion a year ago.
If that sounds unreasonable because France Telecom tends to grow its sales year-over-year rather than shrinking, you have to consider a couple of recent restructuring moves. The company recently sold off its mobile networks in Austria and Switzerland, and the Swiss deal has already closed. France Telecom wants to get out of mature, slow-growing markets like these to refocus on higher grown in other parts of the world.
There's more where that came from
It's cool to see a large telecom aspiring to grow these days. The greenfield opportunities for France Telecom sit mostly in the French-speaking parts of Africa at the moment. We're talking low-cost, high-volume expansion here, not the expensive installation of cutting-edge infrastructure it takes to grow your footprint in the fully industrialized world.
In the last four reported quarters, France Telecom grew sales a modest 4% year-over-year. That's right in line with worldwide rivals: Vodafone (Nasdaq: VOD ) saw a 3.3% boost over the same period and American counterpart Verizon (NYSE: VZ ) is looking back at 4% sales growth.
In this report, we should get an update on the international strategy -- progress, prospects, and profits. Once again, don't panic over a small sales drop this time nor over soft revenue guidance for the rest of the year. The Swiss and Austrian operations were pretty big, and their absence will be noticed.
Who is the king of France? Cash, of course!
And of course, earnings numbers aren't all that important either. What matters is how quickly France Telecom's cash flows can grow, so that the dividend payouts can stay bulky and safe. Over the last four reported quarters, the company tallied up just $4.5 billion in net income but $19.7 billion in cash from operations, and only spent $8.2 billion on capital expenses. $5.4 billion allocated to dividend payouts took out about half of the free cash flows, leaving lots of room for payout increases, faster infrastructure builds, or growth by acquisition.
That's why France Telecom's cash flow results trump all other numbers in every report. In my view, continued cash flow growth even outweighs the top-line growth plans. Even if France Telecom's revenue growth hit a brick wall today, the business is a fantastic cash cow and income investors should be happy to hold it anyway.
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