The most important moment in years for Telefónica shareholders is approaching. The company will celebrate Investor Day on November 8, when it will announce the new strategic plan for 2023-2026 and third quarter results. It is the first time since 2012 that a meeting with these characteristics will be held with César Alierta as president. José María Álvarez-Pallete called up two for Telefónica Deutschland and Telefónica Brazil in 2017 and 2018. So the market is waiting with excitement. Over the course of the year the value increases by 5.47%.
The main interest is to know how the company will deal with deleveraging, which stood at 27,500 million in June, compared to 26,687 million in 2022, and which has been the biggest price depresser in recent years. This is even more true in the current context of long-term high interest rates. The stock cannot regain its pre-pandemic value and is now worth half of what it was in 2019.
The group’s strategy is necessarily to further reduce its debt, the big issue that divides analysts when assessing value. “The debt is high, but 75% has a fixed interest rate and an average maturity of 13 years, which mitigates the impact of higher interest rates and the risk of a rating downgrade,” they defend in Bankinter. However, another part of the market believes that the solution would involve a change in shareholder compensation policy, sacrificing dividends in return for debt reduction.
Ignacio Arce, analyst at Bestinver Securities, believes that the focus will be on “the strategic review of each market in which Telefónica operates (evolution of the competitive environment, growth prospects and improved returns); Leverage with debt reduction opportunities; the sale and rotation of assets (including Telefónica Tech, the various FiberCos, Hispam, the submarine cable, etc.) and shareholder remuneration”, where a “new dividend policy” can be proposed.
Arce sees two possible levers for value: “Although unlikely, the possible sale of Hispam.” [división que agrupa los negocios de Latinoamérica, excepto Brasil y Argentina] or cutting the dividend could be received positively by the market and help reduce the balance sheet more quickly.”
Regarding shareholder remuneration, Divacon’s AlphaValue comments: “European telecommunications companies stopped recording proper growth a long time ago and the dividends have become more valuable. Today, Telefónica offers a dividend yield significantly higher than its peers (8%), reflecting the financial markets’ loss of confidence in the ability to reduce debt while maintaining remuneration.” The company began 2023 with the Spanish company as a member of its brand portfolio; He’s not currently there, but “he still likes it.”
JP Morgan, in turn, directly recommends Telefónica and Vodafone to cut the dividend because the sector’s debt has increased due to interest rate increases. The new strategic plan that Telefónica will present initially envisages a voluntary redundancy plan in Spain for a maximum of 5,000 employees as part of measures to increase efficiency and reduce debt.
Regarding the conclusion of the third quarter, Ignacio Arce expects “weak results at the operational level, with revenues and Oibda in the main business areas (Spain, Germany, Brazil and Hispam) and “a reduction in net debt of 7%”. Goldman Sachs is confident that “the improvement in growth in Spain will continue, albeit at a lower rate, thanks to the support of the macro context and energy cost tailwinds.” Something he also observes in Brazil, “with strong GDP growth.” The bank assumes that “both countries could partially compensate for the effects of the loss of the virtual mobile phone provider 1&1 as the first customer in Germany”.
Currently, the market is largely choosing to maintain value, with 47% of buy recommendations; 37.5% sales and 15.5% sales. The final verdict will be given on the 8th.
A decline in the stock market that has made the company more vulnerable
STC Group. Telefónica comes to its big meeting with the investor after completing one of the most important operations in its corporate history: the entry of the Saudi group STC Group with the purchase of 9.9% of the capital for 2.1 billion euros, making it the first shareholder. STC, which requires the approval of the Spanish government, assures that it does not seek control of the company and has confirmed its support for the Spanish telecommunications company. This has led to a sharp drop in prices in recent years as well as a slowdown in business in some international markets. In parallel, Goldman Sachs believes that the merger of MásMóvil and Orange could become a catalyst for value appreciation. “The risk for Telefónica is asymmetrically bullish; “a failure of support [por parte de la CE] could increase it by 50% over time.”
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