Dial Telefonica for Big, Bulletproof Yield

03/08/2011 1:54 pm EST

Focus: STOCKS

Mark Skousen

Editor, Forecasts & Strategies, High-Income Alert

The diversified and well-run Spanish telecom giant pays a robust dividend that’s set to grow, writes Mark Skousen in High-Income Alert .

No one can say how long the Middle East crisis will last. But this is a time for defensive measures. And today, I have a defensive stock for you.

It is one that we’ve traded profitably before: Telefonica (NYSE: TEF).

Based in Madrid, Spain, Telefonica is a world telecom leader, with more than 280 million customers in 25 countries. The company has a particular emphasis on Latin America.

Telefonica offers landlines, cell phones, and services, as well as network leasing, cable and satellite television, and broadband services. It also is expanding rapidly in Asia in a partnership with China Unicom (NYSE: CHU).

Despite the well-publicized structural problems in the Eurozone, Telefonica is financially strong. Quarterly earnings are up 168%, profit margins are 18.6%, and management is earning a whopping 44% return on equity. This is an investment-grade company with a predictable cash flow and a generous 5.7% dividend.

The euro, of course, has weakened against the dollar during the past year and it could slip further. [Though it’s hit the comeback trail of late, amid talk of interest-rate hikes by the European Central Bank—Editor.] But a significant amount of Telefonica’s revenue comes from outside the region.

And while stocks are wobbly right now due to violence and uncertainty in the Middle East, Telefonica—with a market cap of $115 billion—is a safe haven during the storm.

Telefonica is likely to earn $2.50 a share this year. (That makes the stock cheap at just ten times prospective earnings.) And those profits are likely to rise to more than $2.75 per share next year. This is a world-class blue chip with excellent prospects and a growing dividend.

So pick up Telefonica (NYSE: TEF) at market today and place a protective stop at $20. If you prefer to play this one more aggressively, try the June $26.67 calls, which last traded at 55 cents.

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