Telefonica’s stock price held up much better than expected after the multinational announced it will cut its dividend this year and next. The shares finally closed down 1% after falling as much as 4% in the first few hours of the session. It seems that investors have understood that, on the one hand, it is the company’s best option for reducing debt; and, on the other, that the dividend yield is still very attractive: 4.6% (compared with a previous 8.6%), in line with the sector and higher than the average for the Ibex 35 stocks (4.4%), according to Telefonica’s calculations.
Although the group’s chairman José María Álvarez- Pallete had announced in September that the dividend policy would be maintained, the market never really believed him. A series of factors anticipated a change in strategy for Telefonica, after it pulled the IPO of Telxius, its infrastructure affiliate, and was unable to find a solution for the partial or total sale of its UK subsidiary O2. It had counted on being able to cut its debt via both these deals.
Álvarez-Pallete clarified that the company has abandoned its debt target of 2,35x Ebitda for end-2017, a decision which will probably not go down well with the ratings agency. That said, he was at pains to explain that his main priority now is to maintain the company’s current credit rating. At end-September, Telefonica’s net debt stood at 50 billion euros, down 2.5 billion from end-June.
There are those who have interpreted the dividend news as a sign that the Spanish teleco has ended up giving into pressure from the ratings agencies (Moody’s had threatened to cut the group’s credit rating by one notch if it didn’t implement measures to reduce debt). But it’s certainly a major change in strategy: the company has abandoned plans to sell assets as a main support for deleveraging, and will now focus on generating what the exports call organic free cash flow.
Pallete has chosen not to sell off assets on the cheap, even at the cost of going back to paying a dividend which many consider is more rational, cutting the pay-out to 50% from 90%. That said, this decision has not been well received by its one and half million direct shareholders, and particularly by majority stakeholders led by BBVA and Caixabank. The former has calculated the impact of the dividend cut at 95 million euros.