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Telecoms yields ring up wrong number

www.breakingviews.com

Telecoms companies look superficially cheap when measured against the huge volumes of cash they are throwing off. But dig beneath the surface and a different picture emerges.

The telecoms sector has suffered a torrid couple of months on the stock market. But now some investors are wondering whether it isn't time to buy again.

The reason they are interested is that many traditional telecoms incumbents are trading on fat cashflow yields. That means the cashflow available to shareholders – what's left after interest, tax, capital expenditure and acquisitions, before dividends and buybacks – represents a relatively high proportion of the market capitalization.

Cashflow yields are essentially a proxy for dividend yields. They give an indication of how much cash underpins the payout. Investors look at them when they buy stocks on the assumption that dividends will flow in the years to come.

Using 2004 forecasts, in June France Télécom yielded 13%. Deutsche Telekom and Telecom Italia both yielded 10%. As large European stocks on average trade on cashflow yields of about 7%, these mega-yields are flashing a big "buy me" signal. But that doesn't mean investors should pile in.

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