Friday, January 28

Telefónica: a king of the European dividend without a prize on the stock market

Telefónica heads the European ranking of estimated dividends, with a profitability that reaches 8 percent for next year.

The Spanish operator surpasses giants such as Orange, Vodafone and Deutsche Telekom on the shareholder remuneration podium, according to Bloomberg data.

However, the shares of the multinational company chaired by José María Álvarez Pallete have had a more than discreet behavior on the stock market and are trading 15 percent above the target price calculated by the consensus of

Not even the recent news about the award of LaLiga rights managed to raise the price, which suffers to recover the psychological level of 4 euros per share.

Estimated Dividend Yield on the Stoxx600 Telco (Source: Bloomberg)

A year of challenges for the sector and for Telefónica

It is true that almost all the big telecoms have suffered a fate similar to that of Telefónica in a bag, with more shadows than lights. The year has posed significant challenges.

“The regulatory issue about incumbent companies, the old state-owned companies, is worrying, and it would be good if the pressure were to be released,” he told Iván San Félix, Renta 4 Banco analyst.

But it is also that “there is a lot of competition in Europe, where there are 400 telephone operators for 400 million citizens and that is outrageous,” stressed this expert.

“Telefónica’s exposure to the fiercely competitive Spanish market raises concerns about the sustainability of the dividend”

Bloomberg Intelligence

Without going any further, “in Spain there are very few companies that are making money and there is no business for everyone, which at some point has to end,” said San Félix.

Likewise, the sources consulted insist on emphasizing the negative effect that cost inflation has on the entire sector.

In fact, the latest ebitda reported by Telefónica in Spain fell by 9 percent compared to 2020, which is explained by higher energy costs.

Telefónica and the sustainability of the dividend

Despite all these headwinds, the dividend yield discounted Telefónica 8 percent is the highest among all European telecoms.

If these projections tiptoed over the stock price, it is because of all the challenges facing the sector, but also because of the fact that analysts repeat ad nauseam: Telefónica discounts bad news very quickly and good news very slowly.

On the other hand, the dividend is one of Telefónica’s weapons to defend small shareholders, since the group has many retailers in its shareholding. Hence these high profitability figures, which have generated a debate on the sustainability of the dividend.

“Exposure to the fiercely competitive Spanish market raises concerns about the sustainability of payments” of the dividend, said analysts at Bloomberg Intelligence.

On the contrary, San Félix has no doubt that Telefónica’s dividends are “sustainable”.

“Dividends are more or less 2,000 million a year and they generate much more, apart from the fact that investment spending is going to be reduced, so they will have a little more cushion,” recalled the expert from Renta 4 Banco .

The return of the cash dividend

A different issue is how this dividend is distributed among shareholders. “They should abandon the script dividend format (or remuneration in shares),” explained San Félix.

In fact, this is a possibility that was recently dropped in a meeting with investors by the CEO, Angel Vilá, after noting that the circumstances of uncertainty that justified the remuneration in kind no longer existed.

In the opinion of Juan Peña, an analyst at GVC Gaesco Valores, cash is not what analysts tend to like the most in a company like Telefónica, which needs a lot of funds for its investments.

However, this expert recognizes that the dividend in the multinational is almost a matter of state and points out that “there are many shareholders” who are in value precisely because of the remuneration.

For the experts consulted by there is little doubt about it. For the shareholder, the dividend in shares is always preferable.