Telecom operators in Europe are offering market-high dividends, but their dividend policies are not sustainable in the current economic environment. Several weeks ago Telefónica adjusted its dividend to align with economic realities, and now Telecom Italia's dividend is the most suspect. However, it is not the only dividend for which cutbacks are projected.
"Even though they will continue to offer very attractive payouts, the entire telecom industry is at risk for slashed dividends," said Iván San Félix, an analyst at Renta 4. Dividends for the largest European telecoms are paying 10% on average, but some experts believe that rates this high are not sustainable.
"It is easy to find dividends paying greater than 10% in the European telecom sector, but they are not sustainable because there will be a wave of sector-wide cuts," said Karl Huber, fund manager of Pioneer's High-Dividend European Equity Portfolio & Option Overly Strategy.
Spain opens the door
Experts predict that the sector will follow in Telefónica's path. At the end of last year, Telefónica had to revamp its dividend policy by reducing it from 1.75 to 1.3 euros and including a share buyback option for up to 1.5 euros. If the Telefónica had not changed its policy, investment banks estimated that the company would have had to pay shareholders more than it had earned. The same trend could affect other telecom operators.