(The author is a Reuters Breakingviews columnist. The opinions expressed are his own)
By Quentin Webb
LONDON, July 26 (Reuters Breakingviews) - Telefonica (TEF.MC) may need to put dividends on hold for longer. With Spain’s financial crisis worsening, the telecoms operator has sensibly scrapped the payout for 2012. The move is belated recognition that two previous dividend cuts were too timid, and means the group could now cope with being shut out of bond markets for all of this and next year. But a pledge to reinstate payouts for 2013 could prove too optimistic.
Fears that Spain may need a full bailout, and perhaps a debt restructuring, have sent the country’s borrowing costs soaring, with 10-year bond yields hitting an ugly 7.6 percent this week. That has concentrated minds at Telefonica HQ: with 58 billion euros of debt, and its creditworthiness yoked to Spain’s, the group is suffering collateral damage.
Shelving dividends should save about 4.2 billion euros, Bernstein estimates. It will be particularly unwelcome for the Spanish lenders that are Telefonica’s biggest investors, BBVA (BBVA.MC) and La Caixa (CABK.MC): each own more than 5 percent and previously enjoyed hundreds of millions of euros a year in income. To placate them, and other cash-hungry telecoms investors, Telefonica has promised to resume dividends next year, at a halved 0.75 euros a share.
But even that may not happen - for reasons partly outside Telefonica’s control. Heavy debt maturities continue into 2014. If Spain’s crisis worsens, the group might well need to be ready for a longer market shut-out. Telefonica also needs to sell more non-core businesses to keep deleveraging, and buyers could prove too scared or too stingy to assist.
Telefonica is also taking on excess boardroom pay – but this move looks as half-hearted as its earlier dividend tweaks. Directors are taking a 20 percent cut, but were very richly rewarded to begin with, with the best-paid independents trousering more than 500,000 euros. Top executives will get about 30 percent less this year. So they should: the reduction is largely because a total return-based “performance share plan” from 2009 will not pay out. In any case, a cut of that size to Executive Chairman Cesar Alierte’s 10.2 million euro package would still leave him earning more than his French and German rivals, combined, made in 2011. Meanwhile, shareholders go empty-handed.
- On July 25 Telefonica of Spain said it would cancel this year’s dividend and share buyback programme, as a “one-time exceptional measure” as it dealt with risks and instability arising from an “extremely challenging economic and financial environment”. The move means Telefonica can cover debt maturities through end-2013 without accessing the bond markets.
- The company plans to resume shareholder payouts in 2013 with a dividend of 0.75 euros a share. It also announced a 20 percent cut in pay for board directors, and said executives would see a 30 percent drop in total compensation, partly because no shares will vest this year under a profit-share scheme. Telefonica stock stood 5.4 percent lower by 0832 GMT at 8.19 euros a share, hitting lows not seen since 2003.
- Telefonica statement: link.reuters.com/xak69s
- Reuters: Spain's Telefonica scraps dividend in bid to pare debt [ID:nL6E8IPNSI]
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(Editing by Chris Hughes and David Evans)
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