France Telecom Cuts Dividend Projection as Earnings Drop
France Telecom SA (FTE), the former French monopoly still paying one of the highest dividends among European phone companies, will reduce its payout so it can control debt as cheaper competitors hurt sales and profit.
The owner of the Orange brand, saying it’s coping with a more difficult environment than expected, will pay a dividend of at least 80 cents ($1.04) each for 2012 and 2013, as much as 41 percent lower than last year. The cut is the second this year and marks a drop from a 2011 dividend of 1.40 euros.
France Telecom, trying to avoid credit-rating cuts, follows rivals including Telefonica SA (TEF) in cutting payouts as competition and Europe’s debt crisis crimp sales and margins. In France, which accounts for about half of France Telecom’s sales, smaller carriers, led by Iliad SA (ILD), have fought it with discounts.
“Our priority is to keep our debt under control, it’s important for us to keep our credit rating,” Chief Financial Officer Gervais Pellissier said on a conference call. “Our acquisition policy will be selective, and in France we’re shifting from cost-control to looking to reduce costs.”
Chief Executive Officer Stephane Richard refocused on preserving cash eight months ago, when the company cut its dividend forecast for the first time and abandoned a promise to buy back shares. Still, the Paris-based company faces the threat of having its credit rating cut for the first time since 2002 by Moody’s Investors Service, which said in August that the company may have trouble sustaining its debt ratios.
While the dividend cut should help support credit ratings, France Telecom will have a tough time achieving its targeted debt level because of competition in France, said Sam Morton, a strategist at Mizuho Financial Group Inc.
The phone company forecast it will reduce net debt to a ratio close to twice earnings before interest, taxes, depreciation and amortization by the end of 2014, compared with 2.2 times at the end of this year. Third-quarter Ebitda declined to 3.65 billion euros, while sales fell 3.5 percent to 10.8 billion euros, in line with analyst estimates.
At home, France Telecom competes against Vivendi SA, Bouygues SA and Iliad. The latter, founded by Xavier Niel, scooped up 5.4 percent of the French market in its first six months by selling cheap packages starting at 2 euros a month.
France Telecom said its operating cash flow would only grow again in 2014, once pricing pressure stabilizes in France. Meanwhile, operating cash flow will be more than 7 billion euros next year, from a target of close to 8 billion euros in 2012.
The dividend cut is set to bring France Telecom’s yield nearer to its peers. An unchanged dividend at yesterday’s closing price would have meant a yield of about 15 percent, double the industry average.
Competitors in the telecommunications business, an industry which has paid generous dividends historically, have also curbed payouts. Spain’s Telefonica suspended its dividend in July, and Dutch carrier Royal KPN NV cut its payout forecast the same month. Telekom Austria AG last month reduced its dividend projection for the second time in less than 10 months, citing increased competition.
France Telecom, which has also shied away from acquisitions this year to hoard cash, will not be blind to opportunities at the right price, CEO Richard said during a conference with financial analysts.
The company’s policy for acquisitions involves consolidating its existing positions or gaining market share in high-growth countries, CFO Pellissier said.
France Telecom will “most probably” make an indicative offer for TeliaSonera AB (TLSN)’s Spanish unit Yoigo and would look at Vivendi’s Moroccan phone business Maroc Telecom SA if it were for sale, Richard said. He described any plans around Maroc Telecom as “complicated,” given France Telecom’s stake in Meditel, Morocco’s second-largest operator.
“We thought cutting the dividend was a necessity to manage our debt situation, not for the M&A agenda,” Richard said. “Still, we should have the discipline to seize opportunities within the financial frame we have defined on debt and dividend.”
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