Cellcom Israel: Dialing up dividends
Speculators should consider this high-risk, high-yielding Israeli wireless-telecom operator.
Despite political tension in the region, Israel is home to one of the most undervalued dividend stocks I know of: Cellcom Israel (CEL).
If your long-term investing goals include generating income and modest capital appreciation, I suggest you dial up some dividends in the Middle East and consider adding some shares to your portfolio.
Cellcom is the largest wireless provider in Israel, with 3.4 million subscribers and a 33% market share. In other words, it's an international blue-chip stock. And it boasts compelling fundamentals, including:
Steady demand and steady cash flow. To say Israel embraces cellphones is an understatement. Penetration rates top 100%, which means many people own more than one phone.
While this limits subscriber growth, it creates an opportunity for a well-managed company like Cellcom to generate fistfuls of cash by providing a vital service to Israelis. And it does. In the last two quarters, Cellcom generated over $150 million in free cash flow.
Favorable demographics. Israel's overrun with young people, who tend to be more receptive to new technologies. The median age is 29.4 years, compared to 36.9 years in the United States. This plays right into the company's growth strategy of providing value-added data services.
Growth opportunities. Revenue from data services -- the fastest-growing segment for all wireless providers -- should contribute to steady, overall increases in sales.
In the most recent quarter, data and service revenue increased a solid 5.2% and now account for 25% of overall sales.
Dollar hedge. By investing in a foreign dividend-paying stock, we get an automatic raise (and potentially a hefty one) should the U.S. dollar really take it on the chin.
An investment in Cellcom does carry some risks, namely regulatory and execution risk. The government is trying to encourage more competition by implementing number portability.
And Cellcom is getting a new chief executive in January. But I'm convinced the stock's current valuation and yield outweigh these risks.
Right now, Cellcom trades at an extremely undervalued price, with a price-to-earnings ratio of just 6.53. That's equal to about a 50% discount to U.S. carriers such as AT&T (T) and Verizon (VZ) and Britain's Vodafone (VOD).
The upside to the company's depressed stock price is, of course, a higher yield. At current prices, Cellcom sports an attractive 9.9% dividend yield.
It's true that the dividend is subject to a foreign withholding tax of 20%. However, U.S. tax law allows us to take a credit or deduction for such withholdings. Check with your tax advisor to determine which option makes most sense for you.
Even after we factor in the withholding, shares still yield over 7% -- more than enough to justify the trip overseas.
Bottom Line: Cellcom reports third-quarter results after the market closes on Tuesday, making Monday perhaps the last time to pick up shares at these levels. Institutions have been net buyers over the past three months. It might be time for us to join them.
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The solid report comes a month after the retailer closed all of its Canadian operations.
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