High-Yielding Telefonica Slashes Its Dividend
Tony is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
During this time of stock market turmoil, many investors have gone on a search for more safety, for higher yielding stocks.
One area that some investors have sought shelter in are European telecommunications stocks, which have an average yield of roughly 8%. Among European telecom companies, one of the highest yielders is the eurozone's largest telecoms company, Spain's Telefonica S.A. ADR (NYSE: TEF).
Telefonica's double-digit dividend yield looked so tempting, especially after Telefonica's chief financial officer, Angel Vila, said just over a month ago that the company was not considering a dividend cut.
But then on December 14, Telefonica said that recent “significant changes” in market conditions had forced it to lower its payout for 2012 from 1.75 euros to 1.50 euros, bringing its yield to just under 10%. Mr. Vila said simply that Telefonica needed greater financial flexibility.
It became the first of the large European telecoms company to give in to the tug and pull between needed capital expenditures and payouts to shareholders.
European telecommunication companies have been squeezed in recent years by declining revenues in their domestic markets and mounting costs to improve their networks as well as expensive auctions for spectrum to carry next-generation 4G mobile services.
European telecommunication companies are being 'milked' in the 4G spectrum auctions by governments desperate for cash. Spending on spectrum alone in Europe is expected to reach 20 billion euros over the next few years.
Part of the reason for the dividend cut had to be Telefonica's first quarterly loss in 9 years, which it reported in November. The company has been struggling with falling sales in its home market and a high debt ratio which currently stands at 2.50. In addition, Telefonica had the highest debt-to-dividend payout ratio in Europe.
One bright spot is that revenues in the company's Latin American operations, which accounts for 46% of total revenues, have continued to grow. These subsidiaries include strong local operators such as Brazil's Vivo.
However, the main problem continues to be its struggle with its debt burden. Telefonica said it would continue to follow its strategy of divesting itself of smaller and non-performing, non-core assets in order to pay off some of the debt.
But that is not a long-term solution. Telefonica either needs to increase its cash flow or, more likely, additional dividend cuts will occur sometime down the road.
The other European telecommunication companies face the same problems as Telefonica – stagnant growth in their home markets, limited cash flow, high debt burdens and rising costs. Many of them don't have a growth pillar either, as Telefonica does in Latin America.
Other candidates for a possible dividend cut in 2012, with worse problems than Telefonica, have to include Portugal Telecom ADR (NYSE: PT) and Telecom Italia S.P.A. ADR (NYSE: TI).
Telecom companies whose dividend payout looks secure for 2012 include the likes of France Telecom SA ADR (NYSE: FTE) and Britain's Vodaphone PLC ADR (NASDAQ: VOD), which does have large exposure in faster growing emerging markets.
The author holds no positions in any of the companies mentioned.
