“The Best Investment Left Standing”

By Travis Johnson, Stock Gumshoe, November 10, 2008

This morning we’re taking a brief break from the multitude of investment teasers that focus on the changes we expect from the Obama presidency — lately, many of those ads are hinting at riches from alternative energy companies and infrastructure-related firms, and I’m sure we’ll get back to them before too long.

But today, I’m looking at an ad for High Yield International, which is a new letter from Street Authority. The newsletter will cost you about $400 a year, which I guess is sort of the middle of the pack in terms of letters that focus on global stocks.

The Gumshoe’s sleuthing of their picks, of course, will be gratis. Just read on!

You will be unsurprised, I imagine, when I tell you that High Yield International focuses on finding foreign stocks that pay high dividends. Almost every stock market in the world pays a higher average dividend than does the S&P 500, so it’s not necessarily hard to find high yielding stocks overseas … but of course, this letter claims to be finding the best of them. What can they tell us?

Well, first of all, they employ a little hyperbole to get your attention:

“The Best Investment Left Standing … It pays you up to 27.1% a year right now — no matter what happens on Wall Street!”

That 27.1% refers to the highest yielding examples from the portfolio of stocks touted by the newsletter, not to an average, but it certainly does sound exciting, no? Essentially, the argument is that much of the rest of the world is growing faster than the U.S. economy … here’s a bit more of the sell:

“Despite the damage the United States is inflicting on the global economy, worldwide growth will still clock in at a healthy +4.0% this year.

“China is growing at +9.8% this year and will post +9.0% next year. Taiwan is growing +4.3%, eight times as fast as the U.S.

“The picture is similar in South America — Peru, Argentina and Uruguay are averaging about +5.0% growth this year, while the Brazilian economy, the world’s 10th largest, is seeing +4.8% growth this year.

“Eastern Europe and the former Russian republics are rolling like juggernauts. Many African nations are exceeding the global growth rate — Angola by a factor of four — and the Middle East is matching South America’s torrid pace.

“Here’s where it gets interesting: Many companies in these countries pay extraordinarily high dividends. In the current issue of High Yield International you’ll find 16 securities paying more than 14% — four times the U.S. average, but with none of its problems.”

Of course, everyone’s definition of “left standing” might differ — but I would infer that this means these stocks have done well while the world washed out. That is, of course, not generally true — most of the stocks he talks about have extremely high yields, but in most cases it’s not because their yields have gone up dramatically following great performance, it’s because the stock prices have gone down dramatically. Yield is the price of the stock divided by the amount of the annual dividend — so if the price of the stock goes down, of course, the yield goes up.

And you may or may not have noticed that last line of the quote “none of its problems.” I think we can all look at Russia, Eastern Europe, Brazil and the Middle East and note that though their problems differ from America’s, and their growth remains faster even with some serious slowing on the horizon, it’s not necessarily a “no brainer” to choose their problems over ours.

But that’s essentially what we’re doing here — looking for high yielding international stocks, most of which are in “emerging” economies.

And with prices falling and dividend yields climbing, income investors or others who search for high yield have an incredibly ripe orchard stretching out before them, not just in emerging markets and overseas but even here at home (Verizon is yielding 6%? Seriously?)

Of course, for many people it appears that the orchard is full of hungry grizzly bears and alligators — the question is, are the predators going to eat you if you wander in and reach for one of these tempting fruits, or are they just looking for tasty fruit, too?

No, I don’t have the answer — sorry, I just come up with the tortured metaphors.

But I can tell you about a few of the ripe, low-hanging fruit that the folks at High Yield International are urging you to buy. And I will try to resist the urge to extend my strained metaphor to incorporate Eve and the serpent.

There are a dozen or so stocks mentioned in this ad, so I’ll pick a few of them to sleuth out for you — if they sound interesting, I’ll keep at it and get into the rest of them in future articles.

“For steady gains, it’s hard to go wrong with the #1 wireline phone company in the Czech Republic — the wealthiest of the former Soviet Bloc countries. In addition to its core local-phone service, the company provides wireless, Internet-access, and long-distance. Its revenue is rising steadily and it recently announced it would raise its payout ratio, practically guaranteeing higher dividends ahead. Trading in both Prague and London, it yields a healthy 11.3%.”

This must be Telefonica 02 Czech Republic. This is the leading wireline company in the Czech Republic, and one of the leading wireless companies (they compete primarily with Vodafone and T-Mobile). The company was formed by the merger of the old state-owned wireline company and a mobile operator a few years back, and is now 70% owned by Telefonica, the big Spanish phone operator.

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And about that yield … yes, it is very, very high right now, and Telefonica o2 has been seen as a stable high yield stock for some time — but the bit about the “payout ratio” is somewhat misleading. Payout ratio is the percentage of earnings that are paid out in dividends, and people usually use this number as part of an assessment of a company’s ability to keep paying dividends.

Their payout ratio this year is well over 100% — they had a big load of cash, and the plan has been to redirect it to shareholders with these large payouts and with special dividends in the past, but it is quite possible that this gravy train lasts less than forever. Raising the payout over 100% is an aggressive move, but it certainly doesn’t guarantee that the dividend will grow in the future.

The dividend for this year, which was paid in September, was about 16 billion Czech Korunas, and the earnings for last year were closer to 10 billion Korunas (a Koruna is worth about a nickel right now). So the share price on the Prague exchange is about 400 Koruna, and the last dividend was 50 Koruna per share (the same amount they paid last year), so that is a 12.5% yield at today’s price. It would have certainly been possible to call this a 11.3% dividend in recent months when the price was a bit higher, especially if you try to translate it to dollars.

Will they continue to pay out cash and earnings at this high level? Hard to say — this is not a rapid growth company, wireline earnings are declining, as in most countries, and mobile services are increasing, but penetration rates for mobile phones are already extremely high in the Czech Republic — over 100%, though some prognosticators think it will go as high as 125% (meaning, as I understand it, that a family of four would have five phones). Current penetration rate for Western Europe is more like 110%, though several countries are at or near 150%, and I think the U.S. is down around 85% as of last year. So it may well continue to grow, particularly if the population grows, but it is in a very competitive business and it would be a challenge to grow subscriber counts faster than the population grows.

Telefonica O2 is looking to Czech’s ex-spouse, Slovakia, for growth, but there, too, they’re entering a competitive market that already has high mobile phone use. They may grow, and they don’t have much debt, but I have no idea whether or not the dividend will grow from here.

Oh — and if you’re interested and want the ticker, this one does trade in Prague, though if you’re like most people you don’t. There are GDRs (Global Depositary Receipts) in London under the symbol TECZ and they’re priced in dollars, but they don’t appear to trade much — last trade noted on the LSE site was on October 29 at about $18, the current value is probably closer to $20 based on the current exchange rate and the last price in Prague. There are two pink sheet symbols that also trade very lightly, TFAOF and TFATF.

And if you like this one and emerging market telecoms in general, you could always look at the parent company, Telefonica, which is more than 10X larger than this small semi-independent subsidiary ($80 billion+ market cap versus o2’s $6 billion), paid out an effective yield of almost 7% this year, and has operations across Europe and in Latin America, among other places.

Well, there are a lot