France Telecom (FTE) is one of our favorite European stocks at T&T Capital Management. The stock has been battered due to increased competition particularly from Illiad’s “Free” network. The lower cost operator is stealing market share away from FTE, and investors are concerned that it could negatively impact margins. In looking at the history of these types of small upstart operators, the incumbents usually do quite well and I think the risk is overstated by the decline in France Telecom’s stock price. In addition FTE has expansive international operations which are growing revenue, and at the current price FTE sports a dividend yield greater than 10%. I think an investment in FTE at these prices is likely to lead to 12-15% annualized returns over the next 3-5 years, and I don’t think the risk is that great. Telecom’s are similar to utilities in that they can be expected to earn a return slightly greater than their cost of capital due to the high capital demands of the industry. Troubles in Europe will eventually fade and FTE will be a long term survivor.
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