This is based upon Tax Withholdings being increased to parity with Portugal and France at 30% (vs. 21% currently) and the Euro eventually being devalued to parity with the US$. I do not anticipate further dividend cuts (as this will be accomplished via currency devaluation) and expect TEF to meet or exceed targets (again, thanks to currency devaluation). So bottom line, for US residents, be prepared for more losses.
I posted this reply in "I smell capitulation..." but apparently it got overlooked....
You could be right. But you're forgetting a couple of facts in your analysis:
1) The Euro 2) Spanish Withholding Rate Rise
TEF could indeed perform well over the long-term, but it's home-based in a country that's sinking fast (Spain) and with a currency who's composition could likely be changed/devalued within the next 3 years.
Spain increased withholding from 19% to 21%. I'm betting they're going to eventually raise it to 30% like Portugal did on PT and France did on FTE. Even if they keep the dividend stable (in Euros) and meet their targets, this will continue to be a stock killer.
Also, many are calling on the EU to devalue the Euro to parity so that the periphery (e.g. PIIGS, including Spain) can be more competitive on the global stage, bolster their economies so the can come into compliance with their Treaties to not run account defecits of greater than 3% of GDP.
Want to see what this will do to TEF if they both come true? OK, here we go (again, we're assuming TEF keeps it's dividend stable in Euros and meets it's current growth and debt reduction targets):
TEF Current Price = $15.65 Projected May 2012 CASH Dividend = 0.53 Euro Projected Nov 2012 CASH Dividend = 0.65 Euro Projected May 2013 CASH Dividend = 0.65 Euro Projected Nov 2013 CASH Dividend = 0.65 Euro
Current Senario: Spain keeps Tax Withholding @ 21% and Euro holds @ 1.31
2012 Dividend Yield BEFORE US TAXES: [[1.18 Euro/Share * (100% - 21%) * $1.31/Euro]/$15.65/share]*100% = 7.8% Dividend Yield
2013 Dividend Yield BEFORE US TAXES: [[1.30 Euro/Share * (100% - 21%) * $1.31/Euro]/$15.65/share]*100% = 8.6% Dividend Yield
Now the not so unlikely scenario that has the market concerned: Euro drops to parity with the US$ and Spain raises withholding to 30%
2012 Dividend Yield BEFORE US TAXES: [[1.18 Euro/Share * (100% - 30%) * $1.00/Euro]/$15.65/share]*100% = 5.3% Dividend Yield
2013 Dividend Yield BEFORE US TAXES: [[1.30 Euro/Share * (100% - 30%) * $1.00/Euro]/$15.65/share]*100% = 5.8% Dividend Yield
If the market were to demand the same dividend yield in US$ to US Residents that the market is currently providing, TEF would have to drop further from $15.65 to $11.95.... again, with TEF hitting it's targets and keeping it's dividend stable. If it were to cut it's dividend, it only get's worse.
TEF may be among best in it's class and may perform admirably, but due to forces outside of it's direct control, as long the down side risk of the Euro and it's host country country continue to be realized, TEF continues to be a high risk investment to US Residents.