Telefonica Cancels Dividend
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Telefonica (NYSE: TEF) recently canceled its dividend and share-buyback policy for the year. According to the company, there is no sign of significant sales growth in 2012. The company plans to resume dividends in 2013, but at a reduced rate. This might be cause for concern for some investors. However, analysts at Goldman Sachs praised the company for this move, saying, “Our analysts believe that prioritizing liquidity and de-leveraging is the right step for Telefonica to take in the current environment, and may help the company avoid the loss of its investment grade credit rating even if the sovereign credit outlook deteriorates.” In the long run, this move will prove positive for investors and for the valuation of the company as a whole.
Now analysts are turning their heads toward other telecoms waiting for them to make a similar move. Telecom Italia (NYSE: TI), for example, would save 1 billion euros by canceling a year’s worth of dividends. The company provides services throughout Europe and Latin America. In fact, revenues from Brazil and Argentina count for 34% of their current revenues.
U.S. telecommunications companies such as MetroPCS (NYSE: TMUS) are not facing such decisions. The company recently reported a second quarter earnings increase of 77%, attributing this gain to a smaller cost per user. However, subscriber losses did lead to a smaller revenue than expected. All things considered, MetroPCS still says its earnings estimate for the year remains on track alongside its 4G network launch in the third quarter.
As the economic concerns still linger in Europe it is good to see companies such as Telefonica thinking about short-term liquidity when it comes to the long-term viability of their company. Telecommunications companies are still a growing area, but that does little to outweigh investors’ concerns over the current economic climate. Telecom Italia would do well to follow their lead in terms of their own liquidity. U.S. companies might not be facing the same economic pressures, but they are facing stagnant growth. Though MetroPCS increased their earnings in the previous quarter, they did lose subscribers. International telecom companies certainly have more room to grow and, as they do so, they spread their risk around. Delaying dividend payouts is merely an insurance policy for Telefonica and should be viewed in a positive light.
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