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Dividend King Telefonica Brasil Trading at Discount

April 03, 2013

Dividend King Telefonica Trading at Discount

A reputation for quality has allowed Vivo to charge more than rivals. Photographer: Adriano Machado/Bloomberg

Telefonica Brasil SA (VIVT4), forecast by analysts to pay the Bovespa’s biggest dividend this year, is trading at a 68 percent discount on concern tighter government scrutiny will hurt the nation’s largest mobile-phone carrier.

Telefonica’s estimated dividend yield of 7.5 percent is almost twice the 3.9 percent average for Bovespa companies, and ahead of the global telecommunications industry average of 5.4 percent. The Sao Paulo-based company, which operates under the Vivo brand, has traded more cheaply than the Bovespa index in terms of price-to-earnings ratio since the end of 2011, hitting a low this year. ​

A crackdown by President Dilma Rousseff’s government on telecommunications providers scared away investors from regulated industries, unfairly weighing on Telefonica, said Andre Baggio, an analyst at JPMorgan Chase & Co. Generous payouts and a good track record with authorities make the company a bargain, he said.

“It’s in a good moment,” Baggio, who has the equivalent of a buy rating on the shares, said in a telephone interview from Sao Paulo. “It has a strong focus on reducing costs, and its mobile business is doing very well.”

Telefonica is expected to issue 3.95 reais per preferred share in 2013, the largest payout of any company on the Bovespa, according to data compiled by Bloomberg. The second-biggest is Cia. de Bebidas das Americas, at 2.93 reais a share.

‘Very Comfortable’

“It is one of the biggest dividend payers in Brazil and it has a well-defined cash flow,” said Paulo de Sa Pereira, a portfolio manager at pension fund Fundacao Cesp, which owns almost 1.4 million shares of Telefonica Brasil. “I am very comfortable with our position in Vivo.”

The phone company, a unit of Madrid-based Telefonica SA (TEF), remains a cheap stock even after outperforming the Bovespa this year. Its shares are up 7.6 percent in 2013, compared with an 8.8 percent drop for the Bovespa. Telefonica fell 0.2 percent to 52.70 reais at the close in Sao Paulo.

Analysts favor Telefonica, with 12 buy recommendations, six holds and two sells. The shares have improved after declining 5.6 percent in 2012 because the parent company cut debt without any effect on the subsidiary, Pereira said. The Spanish carrier has sold assets, including its treasury stock, as demand fell during the European economic crisis.

Least Complaints

Last year, Telefonica Brasil was the lone major wireless provider out of four to avoid a ban on selling new plans in some states for 11 days. Telecommunications regulator Anatel imposed the moratorium to force companies to submit proposals to improve quality.

In December, the most recent month available, Telefonica had the lowest number of mobile service complaints, with 18,000, according to Anatel. Tim Participacoes SA, the closest competitor, had 23,600.

A reputation for quality has allowed Vivo to charge more than rivals. The mobile-phone business collected an average of 23.9 reais a month from customers in the fourth quarter, compared with 21.5 reais for second-place Oi SA.

“Vivo is the most attractive telecom company,” said Alex Pardellas, a CGD Securities analyst in Rio de Janeiro, in a phone interview. “Vivo is betting on better quality service for a higher price.”

The company has cut costs by disconnecting customers not actively using its services, Chief Executive Officer Paulo Cesar Teixeira said in a call with analysts on Feb. 25.

A Telefonica press official declined to comment on stock performance, dividend payments and government intervention.

Wireless Gains

Regulation still clouds Telefonica’s outlook. Anatel is forcing wireless companies to reduce interconnection rates -- fees charged to connect calls from rivals -- by about 25 percent in 2014.

“There’s a perception that there’s more regulatory oversight of the sector, and that’s typically not positive for large companies like Telefonica,” said Richard Dineen, a New York-based analyst at HSBC Holdings Plc., who has a neutral rating on the stock.

Last month Rousseff announced a plan to grant more power to consumer bureaus to issue fines and broker deals between companies and customers.

“When we seek greater transparency, this can lead to lower prices in the market,” Anatel President Joao Rezende said at a March 15 event in Brasilia.

Telefonica also has to guard against a decline in its landline business, where customer connections dropped 2.2 percent in last year’s fourth quarter from a year earlier. The company is investing in fiber-optic technology to improve television and Internet services offered over its network.

Telefonica is “recuperating,” Pereira said. “It’s the best company in the sector.”

To contact the reporter on this story: Christiana Sciaudone in Sao Paulo at csciaudone@bloomberg.net

To contact the editor responsible for this story: Ed Dufner at edufner@bloomberg.net


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