Call ‘Collect’ for Foreign Profits

04/20/2011 1:23 pm EST

Focus: GLOBAL

Richard Band

Editor, Profitable Investing

These well-managed foreign telecoms are throwing off nice yields that should only increase if the dollar keeps going down, writes Richard Band, editor of Profitable Investing.

Beyond our borders, selected foreign telephone companies offer generous yields with greater growth potential. Here are three of my favorites.

1. Telenor (OTC: TELNY)
Why would you want to own a telco in Norway? For one thing, as a hedge against the ruinous financial policies of the US government.

Thanks to prudent management of the country’s oil revenues, Norway has run a budget surplus every year since 1995. The Norwegian currency (krone), in which Telenor reports its profits (and pays its dividends), is sounder than both the euro and the dollar.

But there’s more to this story. Telenor has expanded far beyond its Norwegian base with mobile and broadband operations in Sweden, Denmark, central and eastern Europe, and five Asian countries. As a result, little-known Telenor is one of Europe’s fastest-growing telecom businesses. Sales will likely pass $19 billion in 2011.

The current yield is 4.2%; dividends have nearly quadrupled over the past seven years. This year’s dividend amounts to only about half of TELNY’s estimated 2011 profits, so an increase of 10% or so seems probable when the board declares next year’s payout.

Because the American Depositary Receipts trade thinly, be sure to enter a limit order specifying the maximum price you’re willing to pay. To capture the 2011 dividend, payable in early June, you’ll need to purchase the stock before May 20.

2. Cellcom Israel (CEL)
This spunky outfit, Israel’s largest wireless carrier, just declared its first quarterly dividend for 2011—the equivalent of 85.7 US cents per share. Annualized, that works out to a super-sweet yield of 11%.

CEL hands over virtually all its profits to shareholders as dividends, so there’s a chance the company may have to trim the payout in future quarters if business hits a speed bump.

On the other hand, this “pay it all out” policy (similar to the approach taken by most US master limited partnerships) imposes rigorous capital allocation discipline on management. Cellcom execs, in short, don’t waste money.

3. Telkom Indonesia (TLK)
The mantra here is “free cash flow.” In recent years, TLK poured huge sums into upgrading both its wireless and wireline networks. Now the company has the luxury of throttling back a bit.

Result: Starting in 2011, each sales dollar (rupiah, actually) will generate more profit—along with a surge of cash that can be distributed to shareholders.

I predict, in fact, that Indonesia’s largest telco will boost its dividend more than 30% by 2013 (from a 2010 base). That’s the kind of growth you want in retirement.

Current yield, based on my estimate of 2011 dividends: 4.8%.

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