Dividend dichotomy Issue I Macquarie Research,

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Dividend dichotomy
Issue I
 We highlight our global top picks and analyse the valuation multiples of
the sector. In particular we focus on cashflow generation, opex/capex
intensity and dividend yield and growth. Of note is the divergence in
dividend yields in Europe relative to the rest of the world.
Eight key takeaways
 Global OCF margins expanding. We target around a 0.7pp increase per
annum in OCF margins from FY11-13 across global telecom operators under
coverage. This is driven largely by OIBDA margin expansion.
 European estimates are cautious relative to global peers we believe. We
target European OCF margin contraction of around 0.4pp pa from FY11-13.
We are more conservative on both opex/capex investment than global peers.
 We highlight the OCF upside for North American operators where we
target a 3pp increase in OCF margins from FY11 to FY12 driven by falling
Smartphone subsidies and lower wireless capex/sales. Higher multiples for
the Americas reflect the more advanced US 4G investment than global peers.
 Interestingly Europe is now trading in line with Japan on an earnings
valuation basis at around 8.7x FY11E PER despite European FCF and
dividend yields being roughly double that of Japan.
 The market is cautious on the sustainability of European dividends as
current FY1 (CY11) European dividend yields are 8.8%, in excess of all other
regions globally (3.5-6.2%). Our estimates imply DPS cuts by 8 operators in
2012 or 2013, of which four are in Europe.
 Oceania has the highest OCF margin of all regions as it is the most
capital efficient with a capex/sales margin of around 11%, materially lower
than the global average at around 16%.
 Globally we model dividend growth of around 5% pa between FY12-14,
with European dividend growth similar to the global average. We stress
the need for selectiveness as within Europe between FY12-14 we model five
DPS cuts and only three stocks with sustainable DPS growth in this period.
 We are now entering the period of global telco relative outperformance;
September to October, the run up to 3Q reporting.