Telecoms dividends set for further fall
European telecoms dividend payouts will fall by a sixth this year, excluding the resumption of payments from Telefónica, as the sector continues to struggle with sluggish demand and fierce competition. Dividends in the telecoms sector plunged 44 per cent last year from a peak of more than €22bn paid for 2011, according to Markit, the financial information services group, as companies slashed payouts to conserve cash on overstretched balance sheets.
The telecoms sector has traditionally attracted more defensive investors given its long-term record of shareholder returns given income from mobile and fixed-line services. The dividend yield on the sector has been among the highest with an average forward looking yield of 5.1 per cent even after the cuts. Competition in the sector combined with the economic downturn and the effects of regulation has dragged down revenues in the past few years, which hit the cash position of group’s guilty of over expansion into new markets over the past decade. Even so, companies in the sector only began to take remedial action to bolster balance sheets through dividend cuts last year. According to Markit, 12 of the 19 major companies in the sector have reduced or suspended payments either this year or last. Tom Matheson, analyst at Markit, said: “Band wave auctions, LTE network rollout, regulations and changing customer behaviour all add up to a squeezed free cash flow. BT’s audacious £1bn assault on premium content for interactive services is just the latest example of how hot competition is getting.” These risks, he added, combined with sluggish growth and the need for restorative M&A, have led the market to attach a high risk premium on any dividends paid. Markit said dividends will be 16 per cent lower this year again overall, although the group stripped out the effects of the resumption of Telefonica’s dividend after a one-year hiatus. Including the payment by the Spanish group, aggregate dividends across the sector are forecast to grow 12% year-on-year. Last year, the Spanish group axed its shareholder payments in order to reduce its net debt to earnings ratio. Telefónica will resume its dividend policy with payment worth about €3.4bn, according to Markit. Markit predicted that the “worst might be over” in spite of the forecast of further cuts to come this year, most notably by Telecom Italia. There was an “improving picture by 2014”, by which time all companies that it tracks are forecast to resume dividends. Next year, Markit expects that five groups will even increase dividends again. Before then, Markit forecasts seven companies to cut dividends again this year, including KPN and Deutsche Telekom. Of companies where management has yet to make intentions clear, Markit said its primary concerns were Telecom Italia and Belgacom. Telecom Italia has a huge debt that needs to be reduced, he said, while Belgacom has low free cash flow. “We’re forecasting Telecom Italia to scrap its payment entirely and we’re forecasting Belgacom to reduce its annual payment by over 30 per cent,” according to Mr Matheson. “Both these companies have high short interest.” Belgacom fired Didier Bellens last week after the chief executive remarked that the government was only interested in the company’s dividends. Markit predicted last week that Mr Bellens might be ousted over the comments, which it said could mean “twists to come” for the majority stated-owned group. Meanwhile, the outperformer in the industry has been Telenor, the Norwegian operator, according to Markit. “Exceptionally, it has increased its dividend every year since 2010 and shows no signs of bucking this trend,” it said.