What You Need To Know About Telefónica Deutschland Holding AG’s (FRA:O2D) Cash Situation

If you are currently a shareholder in Telefónica Deutschland Holding AG (FRA:O2D), or considering investing in the stock, you need to examine how the business generates cash, and how it is reinvested. What is left after investment, determines the value of the stock since this cash flow technically belongs to investors of the company. Today we will examine Telefónica Deutschland Holding’s ability to generate cash flows, as well as the level of capital expenditure it is expected to incur over the next couple of years, which will result in how much money goes to you.

Check out our latest analysis for Telefónica Deutschland Holding

What is Telefónica Deutschland Holding’s cash yield?

Telefónica Deutschland Holding’s free cash flow (FCF) is the level of cash flow the business generates from its operational activities, after it reinvests in the company as capital expenditure. This type of expense is needed for Telefónica Deutschland Holding to continue to grow, or at least, maintain its current operations.

There are two methods I will use to evaluate the quality of Telefónica Deutschland Holding’s FCF: firstly, I will measure its FCF yield relative to the market index yield; secondly, I will examine whether its operating cash flow will continue to grow into the future, which will give us a sense of sustainability.

Free Cash Flow = Operating Cash Flows – Net Capital Expenditure

Free Cash Flow Yield = Free Cash Flow / Enterprise Value

where Enterprise Value = Market Capitalisation + Net Debt

Along with a positive operating cash flow, Telefónica Deutschland Holding also generates a positive free cash flow. However, the yield of 2.95% is not sufficient to compensate for the level of risk investors are taking on. This is because Telefónica Deutschland Holding’s yield is well-below the market yield, in addition to serving higher risk compared to the well-diversified market index.

DB:O2D Net Worth August 13th 18
DB:O2D Net Worth August 13th 18

What’s the cash flow outlook for Telefónica Deutschland Holding?

Does Telefónica Deutschland Holding’s future look brighter in terms of its ability to generate higher operating cash flows? This can be estimated by examining the trend of the company’s operating cash flow moving forward. Over the next three years, Telefónica Deutschland Holding’s operating cash flows is expected to grow by a double-digit 10.45%, which is encouraging, should capital expenditure levels maintain at an appropriate level. Below is a table of Telefónica Deutschland Holding’s operating cash flow in the past year, as well as the anticipated level going forward.
Current +1 year +2 year +3 year
Operating Cash Flow (OCF) €1.68b €1.75b €1.80b €1.85b
OCF Growth Year-On-Year 4.32% 2.76% 3.03%
OCF Growth From Current Year 7.20% 10.45%

Next Steps:

Although its positive operating cash flow, and high future growth, is appealing, the low free cash flow yield is unattractive. This is because you would be better compensated in terms of cash yield, by investing in the market index, as well as take on lower diversification risk. Keep in mind that cash is only one aspect of investment analysis and there are other important fundamentals to assess. I suggest you continue to research Telefónica Deutschland Holding to get a more holistic view of the company by looking at:

  1. Valuation: What is O2D worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether O2D is currently mispriced by the market.
  2. Management Team: An experienced management team on the helm increases our confidence in the business – take a look at who sits on Telefónica Deutschland Holding’s board and the CEO’s back ground.
  3. Other High-Performing Stocks: If you believe you should cushion your portfolio with something less risky, scroll through our free list of these great stocks here.

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.