By Douglas Busvine
BERLIN (Reuters) – Deutsche Telekom <DTEGn.DE> said on Thursday it would cut its dividend for 2019 to pre-empt uncertainty over the outcome of a proposed U.S. mega-merger and to cover the heavy cost of building 5G networks.
The significant shift to dividend policy at Europe’s largest telecoms group sent its shares 3% lower, even though it raised its profit outlook for the year thanks chiefly to continued strong growth at U.S. unit T-Mobile <TMUS.O>.
Deutsche Telekom said it would 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 60 cents as a new medium-term floor – up from a minimum of 50 cents announced when it told investors in May 2018 that it would in future tie payouts to adjusted earnings per share.
“The reset is sensible,” Citi analyst Georgios Ierodiaconou said in a flash note. This was in line with market expectations in the case of the Sprint deal happening, but below estimates in the event of no deal, he added.
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.
But the yields are coming down. 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 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.
Deutsche Telekom’s dividend announcement seeks to address the binary outcome of the drawn-out political and legal battle – deal or no deal.
In so doing, it caps the potential near-term upside to the dividend that would result if the transaction falls through. That outcome would leave Deutsche Telekom smaller, less indebted and more profitable – in the short term at least, say analysts.
The company, based in Bonn, said it expects 2019 earnings before interest, taxation, depreciation and amortization after leases (EBITDA AL) of 24.1 billion euros. 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%.
($1 = 0.9042 euros)
(Reporting by Douglas Busvine; Editing by Michelle Martin and Elaine Hardcastle)