Published February 24, 2023
Orange Telecom’s ORAN-N share price fell 6.4 per cent in 2022. Though the ticker outperformed most equity markets, the stock was impacted by slowing economic activity in Europe, telecom sector weakness and a strong U.S. dollar that dragged the NYSE-listed ADR (American Depository Receipt) lower.
Despite the lacklustre year, heading into 2023, the dividend yield was attractive, the valuations low and the outlook good. In December, I selected Orange as my top dividend pick for 2023 in the MoneyShow’s annual stock-picking contest. Year to date, the pick has done well and is up roughly 14 per cent as of Feb. 24.
For those new to the name, Orange is a French telecommunications provider. Its business in France is complemented by operations in Spain, Poland and other European countries.
Not only is the company a big player in Europe, but it also has significant operations throughout the Middle East and Africa. This reach outside of Europe gives the enterprise great growth exposure to emerging markets. It also provides clients with cybersecurity, cloud storage and even banking services.
Today, the factors underpinning my top pick thesis for 2023 remain intact. The dividend yield is approximately 6.5 per cent, which makes Orange an attractive income-oriented opportunity.
It is worth mentioning two caveats for income-focused investors, however. First, the distribution is paid out semi-annually instead of monthly or quarterly, which could be an issue for those preferring payments more often. Second, there are ADR fees and withholding taxes associated with the dividend, which means the actual yield shareholders collect is closer to 4.9 per cent.
These caveats aside, Orange remains a solid dividend stock, and it is possible that owners will see more capital appreciation for the rest of 2023, as the corporation’s valuations are low and could reasonably move higher. Moreover, global equity markets are coming off a bad year, the economic situation in Europe could stabilize and the Euro may continue to rebound versus the U.S. dollar, which would help the U.S. dollar-denominated ADR.
Since December, the fourth-quarter earnings release and 2023 outlook have reinforced the thesis. Sales in 2022 were up marginally, and the bottom line expanded to €2.6-billion from €0.8-billion. The customer count grew, capex dipped and average revenue per user (APRU) jumped across most of the company’s markets.
Looking forward, 2023′s capex is expected to decline further while free cash flows should increase to more than €3.5-billion from €3.1-billion. Debt metrics are forecast to hold steady, and the dividend should get a bump this year to €0.72 from €0.70. This is good news for income-focused investors, and longer term, the executives hope to grow the distribution to €0.75 by 2025.
The stock could get a final boost if it is able to turn around its troubled Spanish division. This market is very competitive, which has hurt performance there. To try to remedy the situation, Orange and competitor MásMóvil have signed an agreement to combine their Spanish operations. The transaction is based on an enterprise value of €18.7-billion – €7.8-billion for Orange and €10.9-billion for MásMóvil.
Though the merger is subject to approval from antitrust authorities and is not expected until the second half of 2023, passage of the deal would cut the number of big competitors in Spain from four to three, helping Orange in the process. There are no guarantees that regulators will approve the merger, of course, and if the Rogers-Shaw proposal has proved anything, it is that tie-ups in the telecom sector can be long-winded, contentious and complex.
So, there you have it – my top dividend pick for 2023. The stock is off to a good start and has rallied about 14 per cent year to date. In a world dogged by inflation and economic stress, it is nice to have a reliable, cheap and high-yield stock like Orange in the portfolio.
Philip MacKellar is a writer for the Contra the Heard Investment Letter.