Telefónica cuts dividend payments despite growing net income during Q3

José María Álvarez-Pallete López, Telefónica
Telefónica executive chairman and CEO José María Álvarez-Pallete announced reduced dividend payments

A near 40 per cent year-on-year rise in Telefónica’s third-quarter net income was overshadowed by plans announced by executive chairman and CEO José María Álvarez-Pallete to cut dividend payments for 2016 and 2017 as part of efforts to address the company’s debt mountain.

The operator’s earnings report shows that net income grew 38.5 per cent year-on-year to €983 million ($1.07 billion) during the third quarter, despite a 5.9 per cent drop in reported revenue to €13.08 billion and a 1 per cent decline in reported OIBDA to €4.17 billion following increases in depreciation and amortisation costs. OIBDA margin of 31.9 per cent in the recent quarter was some 1.6 percentage points higher than the third quarter of 2015.

In a related earnings announcement, Telefónica noted that OIBDA increased 3.1 per cent year-on-year when measured in organic terms, and third-quarter revenue was “broadly stable in organic terms” compared to the 2015 period.

Net debt stood at €49.98 billion by the end of the third quarter. While the company noted that the figure was reduced by €2.58 billion during the third quarter, Álvarez-Pallete said Telefónica has decided to reduce dividend payments for 2016 and 2017 to “strengthen the balance sheet and intensify the organic deleverage, maintaining an attractive shareholder remuneration.”

Telefónica has been left seeking fresh options for reducing net debt after a planned merger of its O2 UK business with CK Hutchison’s Three UK was blocked by the European Commission, and the collapse of a planned IPO of its Telxius tower business.

The operator reduced its planned 2016 dividend payment from €0.75 to €0.55, while the payout in 2017 will be €0.40, MarketWatch reported.

Carlos Winzer, an analyst at Moody’s, told Bloomberg the reduction in Telefónica’s 2017 dividend will benefit the operator to the tune of €1.8 billion. However, Winzer said Telefónica needs €10 billion to maintain its current credit rating.

Citi analysts appeared more bullish. In a research note cited by the Financial Times the analysts said the operator’s strong free cash flow in the third quarter and planned changes to the way it will pay its 2016 dividend is likely to ease rating concerns in the near term.