Telefonica: A Defensive Stock to Play the European Debt Crisis

The European debt crisis has been repeatedly dominating world headlines for months, if not longer. Although the recent debates over the U.S. debt ceiling have occupied media recently, the debt troubles in Europe remain far from resolved. It seems as if every day a new headline or update comes out that batters European stocks once again. This ongoing debt crisis has caused many European stocks to decline. In many cases, these price declines are unwarranted. There are many European stocks selling for prices that should allow investors to profit once this debt situation is ultimately resolved. I recommend buying dividend-paying stocks to turn a profit here. The reason is that these stocks pay you to own them. It is difficult to reliably predict when the European debt crisis will be resolved and the possibility certainly exists that there will be more market-negative events out of the region until it is ultimately resolved. Further negative news could push your Eurozone stocks down further. The prospect of receiving a solid dividend can make it much easier and more palatable to ride the rapids. It is important to remember that most European stock dividends are subject to withholding taxes. The major exception is companies based in the United Kingdom, which have no withholding taxes for U.S. investors. This article is the first part of a three part series analyzing companies that could be profitable opportunities for investors willing to invest in Europe. The first company that will be analyzed is a telecommunications company with a very high dividend yield. Telefonica S.A. (TEF) is the largest wireline and mobile phone carrier in Spain. Spain is one of the European countries known as the P.I.I.G.S. at the center of the financial and economic problems in Europe. So why would you want to own the Spanish phone company? For starters, Telefonica operates in more countries than just Spain. Telefonica owns the Movistar mobile phone operator, one of the largest phone carriers in Latin America. Telefonica, under the Movistar name or through other wholly owned brands, is the largest mobile communications provider in Brazil, Peru, Venezuela, and Chile. The company is the second largest mobile phone operator in Mexico although there are indications that Telefonica is successfully capturing market share from number one provider America Movil (AMX). Telefonica’s stock has not performed particularly well since the start of the European debt crisis. One reason for this is the company’s Spanish roots. There is a definite feeling of near panic in the markets with just about anything connected to Europe and the P.I.I.G.S. in general. Telefonica is also a major component of most index funds focused on Spain. Many investors have been selling Spain and thus forcing index funds to sell. This forced selling is significant enough to drive down the share price. In the case of Telefonica at least, that fear seems to be misplaced. Telefonica will also be taking a large 2.7 billion euro charge this year due to a layoff in Spain. The company will take the entire charge this year, which will depress earnings. While this will actually improve the company’s earnings going forward, this charge is likely having a negative effect on the stock price. Once again, this strengthens the argument to buy now while the stock is cheap. In addition to the company’s substantial presence in Latin America, Telefonica also holds several other investments that could prove quite profitable going forward.