It doesn't matter if you're new to investing or have been doing it for a lifetime -- you need to understand the business models of the companies you invest in. Understanding how a company makes money greatly reduces your overall investing risk.
In that spirit, today we're going to look at three companies with great dividends and easy-to-understand business models, focusing on businesses that have been around for a while and look as if they're going to stay around -- because what good is a great dividend if the company's not going to be there to pay it out?
Without further ado, then:
1. France Telecom
France Telecom is exactly what you think it is: France's answer to America's AT&T or Verizon. The company provides land-line, cell-phone, Internet, and cable television service to consumers and businesses throughout France, the U.K., Spain, and Poland. By the numbers:
- We like to see dividend yields of around 3%: an arbitrary threshold, but one we think separates the wheat from the chaff. France Telecom's dividend is a staggering 13%, and even though it appears that its dividend will get cut in coming years, it will still represent a high yield. Vodafone
(Nasdaq: VOD), the U.K.'s answer to France Telecom, pays a 3.5% yield: normally pretty good, but not compared with France Telecom.
- We like to see dividend-payout ratios of 50% or less: The lower the percentage, the more sustainable. At 86%, France Telecom's might seem high, but with its dominant market position in France and surrounding countries, it almost falls into the category of a public utility. Payout ratios of such companies can go significantly higher than normal and still remain sustainable.
- Gross margin is an indicator of brand strength, pricing power, and management and manufacturing efficiencies -- factors that directly affect the bottom line. With a gross margin of 42% over the past 12 months, France Telecom has an almost 10-point edge against Vodafone. The less money a company spends upfront, the more profit is left over at the end.
The company was founded in 1990 and is based in Paris. And with more than 165,000 employees, it's truly massive. As of this past January, the company began to face some new competition in its home country, but its command of the market still remains for now, and there's no mystery as to how the company makes money -- a great combination.
2. Philippine Long Distance Telephone
Philippine LDT is the Philippines' answer to France Telecom, Vodafone, AT&T, and Verizon. It delivers land-line, cell-phone, and Internet service throughout the Philippines. The company was founded in 1928 and is headquartered in Makati City in the Philippines. By the numbers:
- Philippine LDT's dividend yield is a big 4.9%.
- The company's payout ratio is 115%. This is high, but again, we're dealing with what is practically a public utility here, so it's acceptable.
- Gross margin is a killer 69% TTM, handily beating out the industry average of 58% and keeping the company's bottom line hale and hearty.
There's no mystery to how Philippine LDT makes money. We like that. We also like that, with 63 million subscribers, the company operates as a near monopoly on the South Pacific islands it serves, providing services that very few go without in the 21st century.
3. Telkom Indonesia
Staying in the arena of foreign telecoms, Telkom Indonesia delivers land-line telephone, cell-phone, long-distance, and cable television service throughout Indonesia. The company has more than 130 million customers and was founded way back in 1884. By the numbers:
- The company pays a robust dividend of 6.7%, versus peer PT Indosat's
- At 45%, Telkom Indonesia's payout ratio is very sustainable. PT Indosat's, at 34%, is even better, however.
- In terms of gross margin, these two Indonesian telecoms are just about neck and neck, with Telkom Indonesia coming in at 63.1% TTM and PT Indosat recording 63.5% -- both strong gross margins.
Telkom Indonesia, with $7.84 billion in revenue over the past year, is a much bigger company than PT Indosat, with revenue of just $2.24 billion. So once again, you have one company that's dominating the market, that provides essential services, and -- in this case -- that's been around since the days of the telegraph. We have another great combination of profitable traits here.
And the winner is ...
All three of these dividend stocks are solid income investments. I like France Telecom best, despite the news of increased competition. New mobile carrier Iliad has already stripped the company of more than 200,000 customers, and France Telecom said it expects to cut its dividend from the current $1.83 per share to somewhere between $1.77 and $1.56. I see that as a relatively minor decrease that will still leave the telecom giant paying a big, healthy dividend.
The silver lining in the dividend cut is that the move shows how sensible France Telecom is. Rather than continuing to throw money at shareholders, it recognizes that competition has arrived, and that it therefore must be a little more conservative with its capital. It's a smart response to the situation, something that gives me some added confidence in the company over the long haul. And France Telecom is still the biggest player in the region by far.
There you are: three great companies with business models any investor can get his head around, and stocks that offer some of the market's best, most sustainable dividends. If today's column has left you wanting more, check out this free Motley Fool special report: "Secure Your Future With 9 Rock-Solid Dividend Stocks." The title says it all. Get your copy while the stocks are hot.