France Telecom (NYSE: FTE ) is the kind of stock you buy because you want to hug its beautiful dividend over a bottle of Chateau Margaux. But last night, management said it will slash payouts in2012 and that the planned share buyback policy goes back on the shelf.
That kind of action tends to get income stocks into serious trouble. When regional telecom Alaska Communications Systems (Nasdaq: ALSK ) recently did the same thing, share prices plunged like a snowslide. Industrial giant General Electric (NYSE: GE ) had to choose between protecting its cherished dividend or its unique AAA credit rating back in 2009. Management chose the credit rating, slashed payouts, and sustained a price drop of more than 40% as the saga unfolded.
But France Telecom's share prices are stable today and on the rise in recent memory. Why isn't this stock getting crushed like all the other dividend-cutters before it?
Frankly, management is showing signs of sanity. France Telecom's Orange brand of wireless communications is facing price pressure in the crucial French market from a new entrant, Free. The company is currently losing subscribers in its largest market and needs the financial flexibility to stem that tide. And let's not forget that Europe is in financial flames today, adding market risk to most of Orange's key geographies.
"Our absolute priority is to have a strong balance sheet," said CEO Stephane Richard. He remembers the financial crash of 2008 and doesn't want to "hit a brick wall" again. The long-term financial health of the company comes first, a dividend aristocrat reputation a distant second.
European analysts love this strategy. Societe Generale likes the strict reins on dividend payouts combined with a commitment to long-term growth. "These results should now provide momentum for the stock," the company said. Mutual fund manager Alberto Espelosin called the cut "a positive step for France Telecom," noting that payouts will still be among the highest in the telecom industry.
Espelosin also expected T-Mobile parent Deutsche Telekom and O2 operator Telefonica (NYSE: TEF ) to follow suit with their own dividend cuts this week. Deutsche is going halfway by holding its payout steady; Telefonica reports on Friday. Stay tuned for the fireworks.
France Telecom's intelligent approach to the dividend question leaves me a happy shareholder, but I realize that some investors may prefer rock-solid dividends that never say die. If that's you, take a look at this special report on 11 ultra-secure payouts. The deep-dive analysis by our top income-oriented analysts is yours for the asking but only for a limited time, so grab your copy right away.