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.
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