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Telefonica to Cut Dividend

Zacks Equity Research

Spanish telecom giant Telefonica SA (NYSE:TEF - News) has announced that it will lower its dividend in 2012 and 2013. The company will be paying EUR 1.50 per share next year (inclusive of EUR 1.30 per share cash dividend and a share repurchase for the balance amount) and in 2013. However, the company did not cut this year’s return and maintains a dividend payment of EUR 1.60. Previously,Telefonica had projected a dividend of EUR 1.75 per share in 2012 and at least that amount from 2013.

The crumbling economy of Spain, which remains one of the worst hit by Europe’s sovereign debt crises, has resulted in a rise in the unemployment rate. This had an adverse effect on Telefonica’s subscriber numbers, as evident by the steep drop (more than 50%) in its broadband market share in October for the first time ever. This lackluster business scenario took its toll on shareholder returns, which the company was compelled to pull back.     

Further, the company delivered less-than-expected results over the past three quarters and operates with a high debt level of approximately EUR 55 billion. Plus, Telefonica is funding its acquisition activities by raising debt, thereby resulting in higher interest expenses.

Despite all the negative implications that these factors are bound to have on the company’s earnings, Telefonica has still maintained its growth forecast of 1% to 4% annually through 2013. However, the long-term impact still remains uncertain and may worry the company’s investors in the coming days.

Further, the dividend cut by a major carrier like Telefonica is also expected to brew changes in other carriers in the region like Portugal Telecom (NYSE:PT - News), Belgacom and France Telecom (NYSE:FTE - News) that possess high payout ratios of approximately 340%, 61% and 81%, respectively.

We are maintaining our long-term Neutral recommendation on Telefonica. For the short term (1–3 months), the stock retains a Zacks #4 (Sell) Rank.

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