• December 16th, 2011
  • Dafiq Hussein

Telefónica has announced that it is cutting its dividends just a few months after saying that its pay-out rate was locked. This move is likely to shock those who have invested in the indebted Spanish telecoms operator and it is also likely to now call into question the sustainability of shareholder pay-outs by competitors.

Telefónica is the Eurozone’s largest telecoms company by market capitalisation. They have said that changes in market conditions have forced them to lower their 2012 pay-out from a forecasted €1.75 per share to €1.50 per share.

The Spanish state monopoly reported in November that it experienced its first quarterly loss in nine years, and that sales were beginning to drop in its home market. They had to axe an astonishing 6,500 jobs. The Spanish division, which was once the flagship for Telefónica, has now also been combined with its European unit.

Chief Financial Officer, Ángel Vilá, has stated that the cuts would now allow the group greater “financial flexibility”, whilst allowing them to pay their investors. He has been quoted saying: “Paying dividends is in our DNA. It became clear to us that our remuneration commitments were not being recognised by the market.” Whether they will be able offer lower rates for international calling however, is something we simply cannot speculate.

It has been announced that analysts have said that the decision would surprise investors in telecoms companies due to the fact that they have historically been fairly safe investments as a result of their rather high dividends.

An analyst at Bernstein, Robin Bienenstock, has said that the cut represents a major psychological shift for Telefónica.

Some analysts have also argued that the former dividend pay-out was simply unsustainable as they struggled with the decline in sales in the economically unstable Spanish environment.

Mounting costs in the last few years have put a real squeeze on telecoms companies as they have attempted to improve networks and pay for expensive next generation technologies, including 4G services around Europe.

It is little surprise that Telefónica has had to cut jobs, and to be honest, it is also little surprise that they have had to reduce their dividends pay-outs, especially in the light of the financial turmoil Spain, and much of the rest of Europe finds itself in.