Telefonica Deutschland announced plans to lower its dividend in order to increase network investment over the next two years. The company said the extra investment was needed to maintain its position and grow cash flow in the competitive market environment.
The operator said it had made progress in recent years with network integration and upgrades after the E-Plus takeover, achieving a 'good' rating for network quality in recent comparative tests. It now wants to accelerate growth with further investment in network quality and the launch of 5G.
The additional investment should contribute to at least 5 percent cumulative revenue growth in the period 2020-22, excluding negative regulatory effects. That compares to expected flat underlying revenues this year. The higher revenues should support OIBDA and continuous margin improvement as well, Telefonica said.
Capital expenditure is expected to peak at 17-18 percent of revenue in 2020-21, compared to an expected 13-14 percent this year, and then return to "normal levels" from 2022. The higher spending will result in a cut in the dividend to 17 cents a share this year from 27 cents for 2018, its first change in dividend policy since the IPO in 2012. Telefonica said this will be the minimum annual pay-out over the forecast period 2020-22.
To further support the investment, the company is relaxing its leverage target, to 2.5x. That compares to a reported 1.8x at the end of September, under IFRS 16. Telefonica said this still gives it significant headroom to maintain its BBB investment-grade rating by Fitch.
Expansion in rural areas, 'smart bundling' with fixed
The network investment will focus on growing the company's mobile market share in rural regions, where German operators have been under pressure to improve coverage and quality, while reinforcing Telefonica's existing strong position in cities. Mainly the 4G network will be upgraded in rural areas, while urban capacity is expanded with the launch of 5G. Telefonica said it plans a "smart investment profile", with the re-farming of existing spectrum and efficient use of technologies, including a planned switch-off of the 3G network by the end of 2022.
Following a number of recent deals for cable network access, Telefonica said it will focus on "smart bundling" of fixed and mobile products, as well as fixed-mobile substitution to deliver "technology-agnostic" services. It has already been testing fixed-wireless services over 5G. Additional growth is expected to come from the B2B segment, and particularly SMEs.
At the same time, the company will continue with its transformation programme announced in 2018, 'Digital4Growth', which focus on cost efficiencies and increased digitisation of service channels.
