Telefonica Sets Cautious Targets Despite Strong Growth

-- Cautious targets leave shares treading water
-- Net profit, revenue surpass expectations
-- Dividend plans unchanged


MADRID (Dow Jones)--Telefonica SA (TEF) delivered strong profit growth Friday helped by a strong contribution from its Latin American operations and tax benefits, but remained cautious regarding prospects for 2012.

The Madrid-based telecommunications company --Europe's second-largest by market value after U.K.-based Vodafone Group PLC (VOD)--said net profit reached EUR2.67 billion in the three months to Dec. 31, doubling from EUR1.33 billion in the same period of 2010 and significantly beating analyst expectations of EUR1.68 billion.

The result included a EUR952 million boost from a reversal of deferred tax liabilities due to the 2010 purchase of a controlling stake in Brazil's operator Vivo.

Telefonica also said it is anticipating an increase in 2012 revenue of just over 1%, adding that the erosion in its operating margin this year should be slower than last year.

Telefonica's client base rose 7%, largely through aggressive expansion in Latin American markets like Brazil and Mexico, an expensive move because of the need to subsidize handsets to attract customers.

The company, Spain's largest with a market value of EUR58 billion, also reiterated its commitment to distribute EUR1.5-a-share return to shareholders this year, just two months after it was forced to cut that from EUR1.75 a share--a positive sign, for a company that relies on a high dividend payout to attract foreign investors wary of holding Spanish shares.

Telefonica's Spanish unit, until 2008 the company's cash cow, posted a 7.6% fall in revenue last year and saw its operating result halved, due in part to costly layoffs in the unit. Spain's economy grew just 0.7% last year, after a two-year recession, but is expected to contract over 1% this year.

At 0851 GMT, Telefonica shares were up 0.1% at EUR12.89, roughly in line with the overall Spanish market.

"At the current prices and looking at fundamentals, the company remains attractive," the analysts of Banesto said. "However, the only catalysts (for the stock) would come from an improvement in the markets where it operates."

Banesto rates Telefonica at overweight, with a EUR18.33 target.