Telefonica to Cut Dividend After Failing to Sell 02 in U.K.

  • Carrier continues to battle with high debt load, deal flops
  • Telefonica comments on earnings in Spanish regulatory filing

Telefonica SA, Europe’s most indebted phone company, will cut its dividend after failing to sell its U.K. wireless unit and canceling a share sale for its towers and submarine cable business.

The decision is a turnabout for Telefonica, whose chairman said less than two months ago that the payout was sustainable, and shows the pressure the company is under to pay down debt. Telefonica will pay 40 cents a share for 2017, down 27 percent from the 2016 dividend of 55 cents, the Madrid-based company said in a statement Thursday. The company had previously said it would pay 75 cents against 2016 earnings.

Operating income dropped 1 percent in the third quarter to 4.18 billion euros ($4.56 billion) excluding depreciation and amortization, the company said in a statement. Analysts predicted 4 billion euros, according to the average of estimates compiled by Bloomberg. Sales fell 5.9 percent to 13.1 billion euros, matching the average estimate.

“The company has decided to modify the dividend in order to strengthen the balance sheet and intensify organic deleverage, maintaining an attractive shareholder remuneration," Chairman Jose Maria Alvarez-Pallete said in the statement.

The earnings follow six rocky months at Spain’s largest phone company, which canceled the initial public offering of the tower and undersea unit and failed to sell 02 in the U.K. after the European Union blocked a deal on competition concerns. Telefonica pursued the now-collapsed deals to raise funds and signal its commitment to slashing its debt load while also sustaining its dividend. The company now has also put off a potential stock offering for 02 until next year, the head of the business said Wednesday.

Telefonica fell 1.5 percent to 9.12 euros at 9:15 a.m. in Madrid. The shares had lost 4.2 percent annually including dividends over the past five years through Wednesday, while the Stoxx 600 Telecommunications Index had returned 8.2 percent a year.

The shares yield 8.2 percent annually in dividends, the highest among Europe’s five biggest phone companies by revenue.

Telefonica follows in the steps of other major Spanish companies that have cut dividends over the past two years to bolster their balance sheets. Banco Santander SA, the country’s largest bank, did so in January 2015, while Repsol SA, the biggest oil producer, announced Feb. 25 it was slashing its payout and is the best performing major European oil producer since then.

Cash Flow

With the lower dividend, Telefonica aims to lower debt organically, while benefiting from growth in free cash flow, according to Thursday’s statement. Telefonica estimates that free cash flow will reach 4 billion euros in 2016, according to the statement.

Telefonica was hurt by the British pound, which slid to an average 1.18 euros from 1.39 a year earlier. The U.K. made up about 13 percent of sales in the first nine months of the year.

Telefonica benefited from its latest price hike in Spain, which accounted for about a quarter of sales. The company continues to increase reliance on high-spending clients as a way to maintain its market dominance. While the carrier has also being touting the recovery of its Spanish performance since last year, it is facing increased competition from rivals, mainly Orange SA, which in the third quarter saw its biggest-ever increase in mobile sales. The carrier also is affected by expensive soccer broadcasting rights.

Among negative impacts, the company also had a bigger-than-expected net loss at the Telefonica Deutschland Holding AG unit in the quarter. The company also recorded a 155-million-euro capital loss following the sale of a 1.5 percent stake in China Unicom (Hong Kong) Ltd. in July.

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