There's a Rhyme and Reason to Call Up This Dividend Stock

One of the best ways to generate wealth over the long-term is to focus on high-quality dividend stocks. These companies afford investors resilient business models and rising income over time. They can also help replace the income lost when someone retires. One such example is Orange SA , and so let's review its business model and future prospects. Making the Call Orange is a diversified telecommunications company that provides a wide range of landline telephone, mobile service, data transmission and other telecommunications services to consumers and businesses. The company operates internationally, but is heavily concentrated in Western Europe. Orange's model is similar to other telecom giants in that it provides a wide array of access to voice and data, as well as equipment such as mobile phones, routers, and other hardware necessary to facilitate the transmission of data. Orange was founded in 1990 and is headquartered in Paris, and was known as France Telecom until 2013. The company employs 134,000 people, generates more than $50 billion in annual revenue, and trades with a market capitalization of $33 billion. Orange's most recent earnings report for full-year 2020 shows the company saw fractionally lower revenue in the last quarter of the year, and revenue for all of 2020 was roughly flat, as well. Orange's Africa and Middle East segment produced strong 5.2% top line growth, and revenue in the company's home country was up 1.6%. That offset weakness in Europe, which saw revenue fall 3.5%. Orange noted that a decline in roaming charges, which is very high margin revenue, caused earnings before interest, taxes, depreciation, and amortization to decline 2.3% year-over-year despite essentially flat revenue. Orange noted that cash flow generation was up 6.4% year-over-year, thanks mostly to declining capital expenditures. The full year saw earnings come in at $1.95 per share, far higher than 2019, which was $1.14. We are more cautious on Orange's near-term prospects, however, and currently expect to see $1.51 in earnings-per-share for this year. Growth Down the Line Like many telecoms, Orange has struggled with producing growth in recent years. The legacy landline phone business has been decaying for years, which used to be an important cash cow for Orange. It is, however, making the necessary investments in things like 5G mobile service, which will help Orange competitively in the coming years. Still, Orange has produced negative average annual revenue growth for the past decade, and we currently expect revenue to be roughly flat for the foreseeable future. Indeed, this is not a stock one buys for the growth potential. The company forecast a small decline in revenue and cash flow for this year, and declining EBITDA. Orange's long-term target for 2023 is to produce organic cash flow of $4 billion. We note that growth will be muted for the coming years given the amount of capital expenditure the company has committed to build out its 5G capabilities. Taking all of this into account, we see just 2% annual earnings per share growth in the coming years, and note that earnings per share tends to be choppy for Orange, so growth will almost certainly not accrue in a straight-line fashion. Competitive Advantages, Returns Competitive advantages are tough to come by in telecom, and in Europe, there is intense competition. Orange leads the way in France and Spain, but pricing pressure is the result of other competitors attempting to supplant Orange as the market leader. This leads to worsening margins and heightened capital expenditures to remain competitive. Orange is investing in 5G capabilities, but that will not provide it with an advantage; that is simply the cost of doing business in terms of keeping up with the competition. Orange has combated this in part by acquiring ancillary businesses that aren't specifically telecom related, which helps diversify its revenue streams. Still, we see Orange's competitive advantages as decent, but not great, and focused on retaining customers at scale, rather than technological innovation. We see Orange's total return outlook as quite attractive with the stock trading under $13. Our expectation of earnings-per-share for this year of $1.51 means that shares trade for just 8.3 times earnings, which is well below our estimate of fair value at 10 times earnings. That should provide shareholders with a ~4% annual tailwind from the valuation alone, should shares rise back to 10 times earnings in the coming years. In addition to that, we forecast 2% earnings-per-share growth. Finally, the dividend is 5.7% today based upon Orange's current declarations. This means that not only does the stock offer a very high yield for investors focused on income, but the combination of the dividend, earnings growth, and the valuation make for 10% total annual projected returns in the coming years. We note that Orange's dividend policy means that payouts from one year to another can vary wildly, but today, the current projection of 71 cents per share is just 47% of projected earnings. We expect just 1% dividend growth for our projections in order to be conservative, but the payout at the current level should be quite safe, and with room to grow in the future. Orange may not be a growth stock, but it does appear to be undervalued, and with a very attractive dividend yield. The current payout, despite its high yield, looks safe for the years to come given the company's resilient earnings.

There's a Rhyme and Reason to Call Up This Dividend Stock

Orange SA affords a 5.7% yield for shareholders and total projected returns at just over 10%.

Columnist Conversation

Data and the Fed

This Weekend on Real Money

We're Floating a New Trade, Despite the Market's Waves

COLUMNIST TWEETS

Please Join or Log In to manage and receive alerts.