“There has been widespread investor disenchantment.” This is how an analyst justifies the sharp collapse of the Telefónica stock market, which lost 15.5% in the last two days after publishing the quarterly accounts and a strategic plan that had aroused great expectations in the market, the first of the Murtra era. The new roadmap of teleco It plans a 50% reduction in the 2026 dividend, but at the same time has generated some concern due to lower cash generation and lower deleveraging than expected by market consensus. “Everything that has been announced is very moderate” or “the strategic plan is a bit lame”, are some of the comments from brokers, who underline the lack of short-term catalysts for value recovery after the correction.
After a few months, strong rumors were circulating about the possible participation of Telefónica in the consolidation of telecommunications In Europe, analysis institutes underline that the strategic plan leaves out this element and downplay the company’s possible role on the European scene. JP Morgan comments that “although the attractiveness of an operation in the Spanish market is clear, it is difficult to see how a Telefónica-led consolidation would be permissible from an antitrust perspective.” In this same sense, Renta 4 analyst Ivan San Félix recognizes that “it is a complicated sector, with a lot of competition and although a consolidation in Spain would be positive, it is not a given that it can happen. “Telefónica would not be the best candidate” in a possible purchase of Vodafone’s assets in Spain and sees more options for a possible operation with Digi, “although there is still time if this happens”.
Goldman Sachs believes there is room for consolidation within the market to “generate value transactions” and estimates that it is “likely that investors will wait for the specific announcement of some transaction to evaluate Telefónica’s financial discipline.” Now the national consolidation, although it would represent a further boost to Telefónica’s objectives, should be achieved through a capital increase, to avoid increasing its financial leverage. A scenario that would penalize the stock and which Luis Padrón, of GVC Gaesco, sees as “complicated” after the sharp decline in the stock market in recent days.
The market had bet on the operations as the catalyst for the action. Since Murtra’s arrival, Telefónica’s new management had decided to participate in the consolidation process of the company telecommunications in Europe, a move that had been discarded by the previous management team, which focused on reducing the financial burden. Goldman Sachs, in fact, in a report published a few months ago underlined that Telefónica was among the telecommunications companies with the greatest upside potential in the face of possible concentration processes in the sector in Europe, together with Orange, Tele2, Telia and British Telecom. A sector which, they say, has entered a phase of maturation which requires less investment capex e which has Telefónica among its most advantaged students after the strong investments made years ago in fiber. According to data from Bloomberg Intelligence, the need for investments of telecommunications It will fall from 15.5% in 2024 to 14.5% in 2027. The absence of business scenarios in the strategic plan has punctured the entire stock market rally of recent months: the value is at February 2024 levels.
Dividend cut
Regarding the strong dividend cut, the market recognizes that this cut is the origin of Telefónica’s strong punishment on the stock market, although analysts point out that it is reasonable. “They took away the sweets from the investors,” quips Luis Padrón, of GVC Gaesco. San Félix asserts that “perhaps the dividend maintained by Telefónica was excessive”, but that it represented a notable attraction for some of its most important shareholders, such as Criteria Caixa, and for a large mass of small shareholders, attracted by an attractive dividend yield. The company has chosen to reduce shareholder remuneration by half by 2026, from 0.3 euros per share to 0.15, and has announced that it aims to maintain a pay between 40% and 60% but linking it to cash generation – which in practice will also imply a cut for 2027 which will leave it at 0.17 euros per title.
At UBS they remind, for their part, that the options market was already pricing in this reduction in the dividend – houses such as BNP had already increased it last week -, “and we believe that here Telefónica has aimed to achieve a balance between maintaining a solid performance and the most rapid recovery of the balance sheet”. The Swiss bank’s analysis team believes that “the growth targets reflect the situation in which the company operates in currently difficult markets: they are lower than those of its main competitors.” Of course, they estimate that if the company manages to achieve its targets and cost reduction plans, the ebitda, capex and cash generation estimates “could be conservative”.
For now, a new cut of 2.76% was added yesterday to the 13.12% drop in the stock market recorded on Tuesday after the presentation of the new guidelines, which leads Telefónica to record the seventh consecutive day of cuts. Its stock closed yesterday at 3.626 euros, far from the annual highs recorded last August, when it reached 4.89 euros, placing it above the consensus target price.
Goldman Sachs believes that the key to the evolution of Telefónica stock in the short term “will be whether investors can trust the existence of upside risks to growth and profitability. In the long term, investors will likely need a better understanding of the structural growth outlook to justify the valuation after the dividend cut” and recall that the teleco It trades with an estimated dividend yield of 4% for fiscal 2027 versus 8% previously.
JP Morgan analysts summarize that although “(Telefónica’s) priorities are anchored on maintaining an investment grade credit rating, organic deleveraging is slow and uncertainty over possible ongoing mergers and acquisitions (M&A) keeps us cautious.” So they stand by their advice to underweight value. Even those at Deutsche Bank are not optimistic, where they comment that, although the plan presented by the company “answers some of our concerns, we believe that the downside risk persists” in the face of high debt – the net debt-to-ebitda ratio is expected to be 2.5 times in 2028, compared to the current 2.9 – and “growth lower than that of many operators”. They therefore conclude that “a substantial cut in cash flow (up to €1.9 billion), a premium share valuation and lower growth compared to its peers, we maintain the recommendation to sell.”
A deleveraging objective which, according to Renta 4, “is not very ambitious” and keeps Telefónica’s debt/GDP ratio above that of the main European telecommunications companies.
