The Curious Case of Telefónica’s Resilient Dividend
Spanish telecommunications giant is scrambling to slash billions of dollars in debt
MADRID— Telefónica SA is scrambling to slash billions of dollars in debt to ward off a potential downgrade that would knock the Spanish telecommunications giant’s rating closer to non-investment grade.
In the past six months, it has tried, and failed, to sell valuable assets such as its British mobile operator O2 and its Telxius infrastructure unit to pare its €52.6 billion ($57.2 billion) debt, a figure that exceeds its market value of around €45 billion.
One thing, however, it hasn’t touched: its 75 euro cents a share dividend. Investors are watching to see if that reluctance continues Thursday, when Telefónica reports third-quarter earnings.
The company’s new chairman, José María Álvarez-Pallete, has said that the 2016 dividend is “comfortably covered,” but that the company will review the payout level at the end of the year. Pressure is growing, and some analysts are betting on a reversal.
Telefónica’s dividend is at “a level that does not currently seem sustainable,” said Mirabaud Securities analyst Javier Mielgo. The company paid out €2.4 billion in cash to investors for its 2015 dividend.
The dividend has some high-level beneficiaries, an example of the interlocking ties among Spain’s most powerful companies and executives. Two of the telecom’s biggest shareholders, Banco Bilbao Vizcaya Argentaria SA and CaixaBank SA, which together hold around 12% of Telefónica’s shares and have four of the 18 seats on its board, benefit handsomely from the dividend.
Telefónica’s dividend payments—€198.2 million to BBVA and €192.86 million to CaixaBank in 2015—helped the lenders boost profit as they struggled with weak loan demand, rock-bottom interest rates and greater capital requirements. The dividend is more important for CaixaBank, a domestic Spanish bank, than for BBVA, a large international bank with operations in Mexico and Turkey.
Still, Telefónica has disappointed shareholders before. It suspended investor payouts in 2012, when Spain was mired in a financial crisis.
“When I speak to investors, there is almost a unanimous view that a dividend cut is what Telefónica should do,” said Javier Borrachero, a Kepler Cheuvreux telecommunications analyst.
Some investors say Telefónica hasn’t cut the dividend because the company believes that operations in several countries are performing well enough to maintain it.
Also, César Alierta, who stepped down last April as Telefónica’s chairman and chief executive, might have made it uncomfortable for his successor to cut the dividend, at least right away. Mr. Alierta, who remains on the board, told analysts in February that the dividend was guaranteed “for the next, I don’t know, five years, 10 years.”
Mr. Álvarez-Pallete, the new boss, has vowed to uphold the company’s 2016 dividend.
One middle ground option analysts have mulled: Maintain the 40 euro cents a share cash payout, but cancel the other 35 cents in “scrip” dividend, in which investors can choose to receive cash or additional shares.
Moody’s Investors Service analyst Carlos Winzer said the credit-rating firm wants to see Telefónica cut debt; it doesn’t care how.
Moody’s assigns Telefónica a rating of Baa 2 with a negative outlook, two-notches above “junk.” Many investors, such as pension funds, don’t buy securities below that threshold.
Mr. Winzer’s message to the telecommunications giant: “Tell us before December 2016 what you’re going to do and we want to see you doing things in 2017 in order to meet the commitment of deleveraging.”