MADRID | There will be no dividend from Telefónica over the next fifteen months. The decision is not surprising but consistent with the situation. Yet, it has a devastating effect on many investors the company had promised to pay 77 cents in December as a second dividend in the year, and again in May.
The company will now retain its full profits within the 2012 balance sheet (€4-€5 billion) to reduce debt and meet investment needs in a context very unfavourable to finance new projects.
The immediate interpretation is that Telefónica has suspended dividends. As the wording used by the company put it,
“we cancel as an exceptional and timely measure any dividend and share repurchase during 2012 (including payments in cash and stock in November 2012 and May 2013).”
Consequently, Telefónica’s 2012 balance sheet will not record dividend payments, and the profits of the year (€2.075 billion in the first quarter) will increase the corporation’s reserves, reinforcing its liquidity and avoiding incurring in more debt.
The decision is prudent, financially orthodox, but disappointing for shareholders. With the market price below €10, maintaining a commitment to a €1.6 dividend per year would be absolutely exceptional, for such high dividend is not matched with such a low price. The market, indeed, had discounted the cutback.
Furthermore the level of company’s profits did not justify the dividend. During the year 2011, Telefónica net profit was €5.4 billion and was devoted entirely (even in excess) to dividends. That can be done only once, to immediately return to the path of a deal dividend that should to be at around 50% of the profits.
That’s what the company chaired by César Alierta now intends to do. Alierta is an experienced and cautious financier who does not like to defy the laws of physics. Better late than never, the decision of Telefónica is sensible, even though it will be criticised. Also, the announcement of the pay cut is highly recommended; it perhaps should have gone a little further, parallel to the dividend in terms of the proportionality of the sacrifice. Nevertheless, it at least indicates realism.