Yesterday Telefónica's payment policy caused some unexpected negative news. In its last shareholder meeting, the group promised to pay out significant dividends through the end of 2012.
Now, nearly four months later, the rating agency Standard & Poor's has decided that the telecom's promise will make it far more difficult for the company to meet certain debt obligations.
After achieving much less growth than expected due to pressures in Spain, the company's credit rating was lowered one step from A- to BBB+.
Telefónica was already under a close watch. More than a year ago S&P remarked that the telecom's their ability to decrease debt was less due to abnormally high dividends, among other things. S&P mentioned in its report that Telefónica's dividend plan was aggressive and would absorb some cash flow from the company. That is to say, that practically all the money that the telecom would generate with its business activity would have to be dedicated to paying shareholders, resulting in fewer resources with which to pay off their debt.
S&P says that the company's position is stable, but the rating agency has underscored the fact that Telefónica's debt ratio will remain nearly three times the ebitda (earnings before interest, taxes, depreciation and amortization) in 2011, while previously they had believed that it would be cut to 2.5 times that much. Still, the consensus from investment banks according to FactSet estimates that this debt ratio could be 2.3 times by the end of the year.
