Portugal Telecom

01/17/2014 6:00 am EST

Focus: GLOBAL

John Buckingham

Editor, The Prudent Speculator

For his favorite speculative idea for the coming year, value investor John Buckingham looks to a European telecommunications play, with holdings in South America as well. Here's his assessment from The Prudent Speculator.

We have been positive on Portugal Telecom (PT) and its domestic turnaround, as well as its 25% ownership stake in Brazilian telecom provider Grupo Oi, for some time.

And, unlike many investors, we were not disappointed when the two telecom firms announced in October that they would merge.

The combination with Grupo Oi, which is expected to bring about material synergistic savings, will serve over 100 million customers, including those in its growing businesses in Africa.

We also like that PT continues to invest in its businesses around the world, using cash to acquire 4G network licenses, enhance residential Internet speeds with fiber optic infrastructure, and build out its TV product.

In sum, we believe that PT's geographically-diverse revenue stream will contribute positively to long-term earnings stability, while generating solid free cash flow that will allow for the continuation of a generous annual dividend ($0.416 pre-tax this year, but likely quite a bit lower in 2014) that is traditionally paid in the spring.

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