Top picks 2013: Telenor SA

This mobile phone operator is a high risk, high yield bet on emerging markets.

By TheStockAdvisors Jan 8, 2013 4:59PM
Businessman using smartphone Image Source Image Source Getty ImagesBy Jack Adamo, The Global Dividend Investor

My top recommendation for more adventurous investors who can tolerate risk in pursuit of greater rewards is Telenor ASA (TELNY), a mobile phone company with core operations in Scandinavia, Central and Eastern Europe, as well as a large presence in India, Pakistan and Southeast Asia.

In addition, it has a 35% stake in VimpelCom Ltd., a Russian company that offers mobile services in many of the former Soviet republics.

Telenor stock is up more than five-fold in the last decade and pays a rapidly growing dividend, currently at 4.4%. As with most European companies, the dividend varies year to year.

Telenor had a stellar third quarter, reporting net income up 39.4%, despite revenue growth of only 3.4% and headwinds in India, Pakistan and Russia. Its unconsolidated affiliates (companies in which it owns more than 20%, but less than 50%) contributed a solid chunk of the increase, as did a large drop in depreciation expense, and a lower tax rate.

As we've seen in most industries lately, growth in Asia has slowed dramatically from 14% to 6%, but that's still far better than the Western economies can deliver. Cost-cutting in India helped keep profit margins solid, while business in core regions remained steady.

I have reservations about Telenor's investment in VimpelCom. Russia is little more than a government-run criminal enterprise. Companies have to keep on Putin's good side, and hope to get what he decides to allow.

Presumably, the Scandinavians have a better relationship with Russia than the rest of the West, but I'm still a little nervous doing business there.

The second thing I'm not crazy about is that the company increased debt a billion krona for share buybacks this year.

With interest rates so low, the EVA crowd (Economic Value Added theory) says this is a good use of capital, but I think a good use of capital is keeping a strong balance sheet with enough cash on hand for capital spending and growth, and paying the rest to the company's owners.

But I'm old fashioned that way. At least the company isn't using the buyback plan to cover extreme shareholder dilution from executive stock option plans. That is what most U.S. stock buybacks are about.

My last reservation about Telenor is that I'd like to see more profit growth from increasing revenues and less from cutting costs, but we're in that phase of the business cycle where that will be harder to come by for at least the next few quarters. That's a worldwide phenomenon. But, these are relatively picayune complaints.

The risk-to-reward profile is positive. This is a good company. I'm looking forward to owning it for a long time. Telenor ASA is a buy up to $64. Buy it with a limit order only. The shares are thinly traded.

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