On an otherwise very gloomy market day, shares of France Telecom (NYSE: FTE) jumped as much as 2.1% on Friday. The catalyst, of course, was an encouraging earnings report from the European telecom with global ambitions.
In the just-reported first quarter, France Telecom reaped adjusted EBITDA of $4.6 billion on $14.6 billion in revenue. The top line was flat year over year and a pleasant surprise to Wall Street analysts, while EBITDA fell 1.7% and in line with expectations.
If these numbers don't look too impressive, it's because the competitive picture in the hometown French market has changed since the year-ago report. A low-cost operator named Free, run by local rival Iliad, put brand-new pressure on France Telecom's margins. That's one of the biggest reasons that shares of France Telecom and fellow French telecom giant Vivendi have plunged over the last year.
The damage to France Telecom from Free's appearance seems to have been inflicted by now. The exodus of French customers is over, and the company is back to adding more contracts than it loses. Free recently signed a roaming agreement with the larger networks, adding back some lost revenue to France Telecom's growth-deprived coffers.
The company is about to launch high-speed 4G services in France while upgrading the 3G network to a faster version, much like the 3G service T-Mobile USA sells as "4G" here in America. France Telecom is also growing strongly in markets like Spain and Africa. Under the Orange brand, the company has 166 million mobile users worldwide today on a 7% yearly growth trend.
The balance sheet is strong but not perfect. Management hopes to lower the net debt-to-trailing EBITDA ratio from 2.2 to 2.0 over the next year or so, which means paying off some debt. To put that goal into perspective, Verizon's (NYSE: VZ) ratio stands at 1.2, AT&T (NYSE: T) has a net debt/EBITDA of 1.8, and Sprint (NYSE: S) comes in at 2.8. Truly shaky operations run much higher; Level 3 Communications (Nasdaq: LVLT) is staring down a 7.8 ratio, for example.
This stock is currently very cheap as investors worry about the impact of Free on France Telecom's long-term health. I see a cash cow with plenty of international growth yet to come, and whose French pricing troubles are receding in the rearview mirror. Management has committed to keeping the double-digit dividend strong, and they have the numbers to do it with a straight face. Generous dividends create long-term wealth, but France Telecom isn't the only great dividend stock out there. To learn more about some other dividend rock stars, check out the Fool's free report detailing nine rock-solid dividends. Just click here to access your free copy today.
