Summary
- Deutsche Telekom is a German telecom operator with high exposure to the U.S.
- It is reporting better growth figures than most of its peers, due to its strong position in the U.S. wireless market.
- However, its current dividend yield is not especially attractive and the valuation seems fair.
Deutsche Telekom ( OTCQX:DTEGY ) has better growth prospects than most of its peers, as the company continues to gain market share in the U.S., but it offers a lower dividend yield and it is not likely to become a high-dividend yielder in the coming years.
Company Overview
Deutsche Telekom is a German telecommunications company, being the incumbent operator in its domestic market. Its main shareholder is the German government, directly and through the public bank KfW, with a combined stake of about 30%. Its current market value is about $110 billion, being the largest European telecom operator by this measure, and trades in the U.S. on the over-the-counter market.
The company is one of the world's largest telecom operators, with close to 250 million mobile customers, 26 million fixed-network lines, and 22 million broadband lines, being present in more than 50 countries. It operates under several brands, including T-Mobile ( TMUS ) in the U.S. and other European countries.
Despite its vast geographical presence, its two most important markets are the U.S. and Germany, which together account for the vast majority of its earnings, as can be seen in the next graph, while other European countries, its Systems Solutions ((SYS)) segment, and Group Development ((GD)) have much smaller weights.
EBITDA, DT
While the vast majority of European telecommunications markets are broadly mature and Deutsche Telekom has relatively muted growth prospects, in the U.S. T-Mobile is enjoying strong growth due to its leading position in 5G. Indeed, T-Mobile is a wireless operator and has differentiated itself from its major competitors, namely AT&T ( T ) and Verizon ( VZ ), by investing significantly in infrastructure. According to Statista , while at the beginning of 2020 T-Mobile's market share was about 17% of total wireless subscriptions in the U.S., its market share has increased over the past couple of years, and in Q3 2022 it was 23.8%.
This increasing market share has been an important growth driver in the recent past, a trend that is not expected to change soon as T-Mobile, and AT&T, have been the carriers with higher net adds over the past few quarters. In Q3 2022, T-Mobile was the leading carrier regarding wireless phone net addictions, according to Counterpoint , increasing its total customer number by some 854,000. Verizon has been a laggard regarding net adds over the past three years, which does not bode well for its growth prospects in the near term.
This positive performance is justified by T-Mobile's competitive offering and some other attractive perks, such as free Netflix, Apple TV+, or free airline Wi-Fi. This helped the company to have low customer churn, which was at only 0.88% in the last quarter, showing that T-Mobile has been able to gain customers and retain them, which is key for sustainable revenue growth. Another competitive advantage is its leading position in the 2.5 Ghz 5G spectrum, which the company gained through the acquisition of Sprint in 2020, offering better service and coverage than its competitors, being also a key reason for higher net adds in recent years compared to Verizon or AT&T.
Going forward, this strategy is not expected to change much, as the telecom industry is highly mature and to gain customers T-Mobile needs to remain competitive, with growth coming mainly from higher market share within the U.S. wireless industry.
Financial Performance
Regarding its financial performance, Deutsche Telekom has delivered a positive performance over the past few years, given that the telecoms industry is usually characterized by low growth, while the company has been able to report higher revenue and earnings growth than some of its closest peers.
As can be seen in the next graph, Deutsche Telekom's service revenue growth has been positive over the past five years, a much better outcome than other large European operators, such as Orange ( ORAN ) or Vodafone ( VOD ) that have a much more mixed performance. This is justified due to a large extent by Deutsche Telekom's high exposure to the U.S., which has been its major growth engine, while excluding the U.S. operation its revenue growth is much more muted and much similar to its peers.
Revenue growth, DT
Beyond reporting positive top-line growth, Deutsche Telekom also has been able to improve its operating leverage, reporting higher EBITDA than revenue growth in recent years, leading to an improved EBITDA margin. Indeed, Deutsche Telekom's EBITDA margin increased from about 32-34% during 2018-19, to about 42-44% in the past couple of years, which compares quite favorably to its major U.S. and European peers.
EBITDA, DT
During the first nine months of 2022 , Deutsche Telekom has maintained a good operating momentum, reporting organic service revenue growth of 4% YoY, and EBITDA growth of 5.9% YoY. This growth was mainly supported by T-Mobile U.S., where it increased service revenue by 5.4% YoY, while EBITDA was up by 7% YoY. Outside of the U.S., the company's service revenue growth was 1.8% YoY, and EBITDA increased 4.3%% YoY, organically.
These strong growth figures during a tough macroeconomic period are a good sign of the strength of its product offering, both in the U.S. and in other regions, given that Deutsche Telekom continues to add new customers on a consistent basis.
Net adds, DT
Due to this strong operating backdrop, Deutsche Telekom raised its guidance for the full year, mainly supported by higher earnings in the U.S., expecting now to reach more than €35.9 billion in EBITDA (vs. €35.5 billion in its initial guidance), while its earnings are expected to be above €1.50 per share (vs. higher than €1.25 per share initially).
Going forward, while Deutsche Telekom's operating momentum is expected to remain positive, its growth is expected to slow down compared to previous years. Indeed, according to analysts' estimates , its revenues are expected to grow at 5.2% YoY in 2022, but should grow only between 1-2% annually over the coming three years. This seems to be somewhat undemanding considering the company's recent track record, and revenue estimates seem to have some potential for upward revisions in the future.
Regarding its bottom line, its net income is expected to be around €6.5 billion this year, and to grow to more than €9 billion by 2025. This means that while analysts don't expect much revenue growth going forward, the company's operating leverage and efforts to cut costs are likely to improve its profitability.
Dividends
Given that the telecoms industry is highly mature and growth prospects aren't impressive, especially in Europe, usually one of the most attractive features of investment plays in this sector is a high-dividend yield. However, Deutsche Telekom is not the usual telecom company due to its high exposure to the U.S. and its smaller size compared to Verizon or AT&T, which gives it a much better growth profile than for the vast majority of its peers.
Indeed, Deutsche Telekom's investment case is not overly reliant on shareholder remuneration and it does not offer a high-dividend yield. The company has recently raised its guidance for its dividend, expecting to pay €0.70 per share related to 2022 earnings. At its current share price, it offers a forward dividend yield of 3.40%, which is much lower than compared to other telecom companies, and like many European companies it only distributes an annual dividend which reduces somewhat its income appeal.
Dividend Yield (Author's calculations)
Moreover, beyond its dividend yield not being impressive, Deutsche Telekom's dividend history is also mixed, as the company has delivered some dividend cuts in the past decade, and its debt levels are relatively high.
Deutsche Telekom's net debt amounted to €109 billion at the end of last September, and its net debt-to-EBITDA ratio was 2.8x, which is above the sector's average. The company aims to reduce this leverage ratio back to 2.25x-2.75x by 2024, which seems achievable based on the company's free cash flow generation and EBITDA growth expected over the next couple of years. This means that Deutsche Telekom's dividend seems sustainable for now, but I'm not expecting strong dividend growth ahead until the company reduces balance sheet leverage, thus Deutsche Telekom is not expected to become a high-dividend yield in the near future.
Conclusion
Deutsche Telekom is reporting much higher business growth than some of its closest peers, due to its unique position in the U.S. wireless market. However, for income-oriented investors, it offers a smaller dividend yield than its peers, while its valuation seems to be fair compared to its historical pattern. Therefore, Deutsche Telekom is a pass for me right now, as the potential of an economic decline both in the U.S. and Europe may lead to a better entry point ahead.
For further details see:
Is Deutsche Telekom A Good Income Play?