Telefonica Cuts 2012 Dividend Amid Economic Woes in Europe

Spain's largest telephone company, cut its 2012 dividend forecast by 14 percent, citing market conditions that have changed "significantly."

The 2012 payout will be 1.50 euros a share, including 1.30 euros in cash and the remainder via share buybacks, the Madrid- based company said in a statement today. The company had forecast a dividend of 1.75 euros. Telefonica still plans to pay a 2011 dividend of 1.60 euros.

Telefonica made the cut as tough market conditions in Spain and the European debt crisis hamper the company's earnings and its goals to reduce debt. Standard & Poor's cut Telefonica's debt rating in August by one level to BBB+, the third-lowest investment grade, citing lower expectations for cash flow and debt reduction and calling the company's dividend policy "aggressive."

"It was inevitable that at some stage they would have to cut it," said Guy Peddy, an analyst at Macquarie Securities in London, who has an "outperform" rating on Telefonica. "It's the timing that is a surprise rather than the event itself."

In November, Finance Chief Angel Vila said Telefonica would reconsider its dividend policy only if its debt rating leaves the triple B category. He said at the time that he was confident the company won't face any more downgrades.

'Very Different'

"We set our previous dividend policy back in October 2009 when market conditions were very different than today's," Vila said at a conference call today. "Markets haven't clearly recognized our shareholders' remuneration efforts and we realized we need more flexibility."

Telefonica's American depositary receipts fell as much as 3.2 percent to $16.76 in New York trading and were down 3 percent as of 12:43 p.m. In Madrid, the stock dropped 1.8 percent today before the dividend cut was announced.

Telefonica's dividend cut follows Credit Agricole SA (ACA), France's third-largest bank by market value, which said today it will scrap its dividend for 2011.

Chief Executive Officer Cesar Alierta is slashing the Spanish workforce, halting major mergers and acquisitions and this year folded its shrinking Spanish unit into a European division to cut debt and stem a 22 percent slide (IBEX) in the stock this year.

As Spain's high unemployment rate prompted consumers to cancel subscriptions or switch to rivals' cheaper offers, Alierta is increasingly relying on economic growth in Latin America, which accounts for 47 percent of sales.

Cutting Debt

Telefonica today reiterated its goal to cut net debt to 2 to 2.5 times operating income before depreciation and amortization. The dividend cut also doesn't affect Telefonica's intention to sell some assets, Vila said.

In Spain, Telefonica holds a 22 percent stake in digital television provider DTS. Other Telefonica holdings include call- center Atento Inversiones & Teleservicios, a 13 percent stake in satellite company Hispasat and a 5.4 percent stake in Zon Multimedia SGPS SA, Portugal's biggest cable-TV provider.

Telefonica shelved an initial public offering for Atento in June because of insufficient investor demand.

Along with Mediobanca SpA, Intesa Sanpaolo SpA and Assicurazioni Generali SpA, Telefonica indirectly controls about 22.4 percent of Italy's former phone monopoly, Telecom Italia SpA, through holding company Telco SpA.

Being in Control

"Cutting the dividend is an action that's in their control whereas asset disposals is not," Macquarie's Peddy said, adding that it's difficult to find buyers in the current market.

The average dividend yield of European telecommunications companies is 7.5 percent, according to data compiled by Bloomberg. Telefonica's yield of 11.3 percent is the fourth- highest after Cable & Wireless Communications Plc, Portugal Telecom SGPS and France Telecom SA.

Spanish Prime Minister-elect Mariano Rajoy has pledged "important decisions" when his Cabinet meets for the first time on Dec. 23 as the economy will need structural changes as well as austerity moves to exit a three-year slump. The People's Party leader will be sworn in on Dec. 21 after defeating the ruling Socialists in a landslide on Nov. 20.

Rajoy will seek to prevent Spain from following Greece, Ireland and Portugal in seeking a bailout amid surging borrowing costs and an economy poised for contraction with unemployment at 23 percent, the highest rate in the European Union.