Telefónica’s Pain in Peru and Argentina Could Be Your Gain

The telecom sector has long been a battleground for investors seeking steady dividends and stable growth. Yet few companies today embody the paradox of short-term pain and long-term promise as clearly as Telefónica (TEF). After taking massive write-downs in its struggling Latin American markets, the Spanish telecom giant now stands at a critical inflection point—one that could reward contrarian investors willing to look past near-term volatility.

The Write-Downs: A Necessary Exit, Not a Write-Off

Telefónica’s Q1 2025 results were a rollercoaster. A €1.73 billion loss from discontinued operations—primarily its divesting Peruvian and Argentine businesses—sent shares reeling. But beneath the noise lies a starkly rational strategy: exiting low-return markets to focus on high-growth cores.

The company sold its Argentine operations for €1.2 billion in February and Peru in April, while securing a deal for Colombia worth €368 million. These moves slash exposure to regions plagued by hyperinflation, regulatory hurdles, and brutal competition. The write-downs, while painful, are a strategic pruning to free capital for markets where Telefónica can dominate.

Core Markets: Where the Growth Lives

The real story is Telefónica’s core markets, which are firing on all cylinders:

1. Spain: Organic revenue rose 1.7%, with enterprise sales surging 5.4%. The company added net customers across all categories for the 7th straight quarter, while maintaining a best-in-class CapEx/Sales ratio.
2. Brazil: EBITDA jumped 8% organically, driven by 14.5% growth in EBITDAaL-CapEx. Fiber-to-the-home (FTTH) expansion hit 11.1%, locking in future demand.
3. Germany: EBITDAaL-CapEx grew 4.8%, with 5G coverage hitting 98% of the market. A regulatory win—spectrum prolongation—will lower long-term costs.

Dividends: A Lifeline in Uncertain Times

Despite the Q1 loss, Telefónica reaffirmed its €0.30 per share dividend, sustaining a 22-year streak. With a ~5.1% yield, this is no minor perk. Investors in a volatile market are clamoring for stability, and Telefónica’s commitment to payouts—amid restructuring—speaks volumes about its financial discipline.

The Undervalued Catalyst: Free Cash Flow and Leverage

The balance sheet tells two stories:
- Short-Term: Net debt rose to €27.05 billion, pushing leverage to 2.67x.
- Long-Term: With Hispam assets exited, Telefónica can slash CapEx and redirect cash to core growth. Management’s 2025 guidance—organic revenue growth, EBITDAaL-CapEx expansion, and a CapEx/Sales ratio below 12.5%—is achievable, and analysts predict profitability rebounding by year-end.

Why Now? The Contrarian Play

The market is pricing in Telefónica’s pain but not its potential. A negative P/E (-24.72) suggests skepticism about execution, yet the company’s track record—shrinking its portfolio, boosting dividends, and outperforming in core markets—proves its strategy is working.

Risks? Yes. But the Reward is Clearer.

Critics will point to execution risks, regulatory hurdles, and the lingering Hispam overhang. But Telefónica’s moves are deliberate: it’s swapping volatile, low-margin markets for high-growth regions with pricing power. With 5G rollout costs easing and fiber penetration rising, the company is building a moat for years to come.

Final Call: A Telecom Turnaround at a Bargain Price

Telefónica is a textbook turnaround story. The write-downs are a one-time hit, but the strategic shift is permanent. Core markets are delivering, dividends are intact, and the balance sheet is on track to recover. At current valuations, this is a buy for investors with a 2–3 year horizon.

The telecom sector isn’t dead—it’s evolving. And Telefónica, after its painful pruning, might just be the sector’s best-kept secret.