November 7, 2019 / 10:58 AM / 11 days ago

Deutsche Telekom cuts dividend as it faces U.S. merger uncertainty

BERLIN (Reuters) - Deutsche Telekom (DTEGn.DE) said on Thursday it would cut its dividend for 2019, reflecting uncertainty over the outcome of a proposed U.S. mega-merger and following rival Vodafone as the industry grapples with the heavy cost of building 5G networks.

FILE PHOTO: A crow rests on the GSM mobile phone antennas of Deutsche Telekom AG atop of the headquarters of German telecommunications giant in Bonn, Germany, February 19, 2019. REUTERS/Wolfgang Rattay

The significant shift in the dividend policy at Europe’s largest telecoms group sent the company’s shares 2.5% lower, even as it reported strong third-quarter results and raised its profit outlook on strong growth at U.S. unit T-Mobile (TMUS.O).

Deutsche Telekom plans to pay a 60 euro cent ($0.66) dividend for 2019, down from last year’s 70 cents, regardless of the outcome of T-Mobile’s $26.5 billion takeover of rival Sprint (S.N) that is currently stalled.

Sweetening the pill, however, the company set that as a new medium-term floor - up from a 50-cent minimum announced when it told investors in May 2018 that it would in future tie payouts to adjusted earnings per share.

“The 60 euro cents announced today is our new minimum dividend amount,” CEO Tim Hoettges told reporters on a conference call. He said he firmly believed that the U.S. deal would go through, although this was now expected in early 2020.

“Creating clarity means that we will pay out the minimum dividend not only if the deal goes through, but also in the unlikely event of a no-deal scenario.”

Citi analyst Georgios Ierodiaconou described the shift as sensible, even if it meant that shareholders might miss out on a higher payout should the U.S. deal fall through - an outcome that would lift near-term profits at Deutsche Telekom.

T-Mobile CEO John Legere is expected to launch a new public push to get the Sprint deal done later on Thursday.

YIELD CONCERNS

Facing saturated markets and with billions to spend launching 5G networks, the telecoms industry’s main attraction to investors has long been its juicy dividend yields.

Those yields are now in jeopardy. Vodafone (VOD.L) - Deutsche Telekom’s main competitor in Germany - slashed its dividend by 40% in May to secure the firepower it needs to pay for acquisitions and upgrade networks.

Equipment vendor Nokia (NOKIA.HE) suspended its dividend two weeks ago, saying it needed to conserve cash and raise investment in making its 5G product offering more competitive - sending its shares down by 30%.

Deutsche Telekom’s move is far less drastic and would still leave it offering a dividend yield of nearly 4% at its current share price.

The step would enable Deutsche Telekom to defend its investment-grade credit ratings, Hoettges said, as it swallows the higher-than-expected price paid at auction for 5G spectrum in its German home market.

LONG WAIT

The T-Mobile-Sprint deal, announced in spring 2018, has won regulatory approval after a lengthy review that sparked controversy in the United States along partisan lines over whether having fewer operators would be bad news for consumers.

More than a dozen attorneys general, mainly from Democrat-led states, have filed a lawsuit seeking to stop the deal. That case will come before a New York judge on Dec. 9. Hoettges said talks were continuing to try and win over the states before the case comes to court.

“We will continue to do all we can - both in court and outside - to convince Americans that this deal makes sense,” said Hoettges.

FILE PHOTO: Signal strength of Deutsche Telekom 5G is displayed on a mobile device at the IFA consumer tech fair in Berlin, Germany, September 5, 2019. REUTERS/Hannibal Hanschke/Files

The company, based in Bonn, said it expects earnings before interest, taxation, depreciation and amortization after leases (EBITDA AL) of 24.1 billion euros this year. That is up from a forecast of 23.9 billion euros previously.

Third-quarter EBITDA AL gained by 5.4% to 6.5 billion euros, narrowly beating expectations in a company poll of analysts, while quarterly revenues topped 20 billion euros for the first time, up 4.8%.

After adjusting for exchange rate effects, the underlying gain in profits was 3% while revenues rose by 1.7%.

Reporting by Douglas Busvine; Editing by Michelle Martin and Elaine Hardcastle

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