Senior Technology Analyst Eric Bleeker discusses future prospects for telecom dividends with Chief Technology Officer Jeremy Phillips. Telefonica, the Spanish telecom giant, scrapped its dividend for the rest of this year and hopes to resume half its payout at the end of 2013. The key reason Telefonica cut its dividend is that it's loaded up with $84 billion in total debt. The debt is a very complicated mix of maturities but includes commercial paper and is generally maturing in the next five years. Telefonica’s plan to suspend dividend payments allows the company to save $12 billion, so it's not surprising, considering the situation in Europe.
The question now is which telecom dividend is next. France Telecom is seeing worse year-over-year revenue declines than Telefonica but has said it'll retain its beefy dividend -- which yields more than 10% -- through 2012 but will reduce it in 2013. The big difference between Telefonica and France Telecom? Telefonica has that $84 billion in debt, while France Telecom has slightly more cash than total debt. That's a huge asset right now, and Eric thinks that considering the conditions, it's a much better buy.
Looking back stateside, the situation in Europe presents an interesting wrinkle for American telecoms. Everyone is focused on whether rural landline-focused companies such as Frontier Communications will continue cutting dividends. However, dividend investors have also cycled to investing in U.S. wireless companies such as Verizon and AT&T this year, based on the strength of their dividends, which has sent their shares soaring. While the two are undoubtedly in a better position to keep paying their dividends than European telecoms or rural landline players like Frontier, the same low-end price competition that looks ready to make France Telecom curtail its dividend in 2013 could ramp up in the U.S. in the coming years, which presents a long-term threat for dividend-focused telecom investors to watch. To see Eric's full thoughts, watch the following video.
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Eric Bleeker and Jeremy Phillips have no positions in the stocks mentioned above. The Motley Fool owns shares of France Telecom. Motley Fool newsletter services recommend France Telecom. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.