Orange cuts dividend in response to COVID-19

While it has been described as a more palatable ‘adaption’, investors will have to be satisfied with a dividend payment which is 29% lower from French operator group Orange.

Taking the dividend down from €0.70 to €0.50 is perhaps not an unusual move during a global crisis which is walking economies towards recession, though Orange is one of the first major telcos to make the announcement. That said, financial guidance has remained the same for the year.

“Based on currently available information, Orange does not expect a significant deviation from its 2020 objectives, but we are closely monitoring the situation and its developments,” CEO Stéphane Richard said.

“The important role played by the telecoms sector during this crisis to ensure the continued functioning of our economy and society as a whole confirms the strategic character of our activities.”

As part of the reaction to the coronavirus outbreak, the upcoming Shareholders’ Meeting will be held behind closed doors, with investors only able to submit votes ahead of the meeting. Postal votes are still allowed, though the management team have encouraged the use of a digital platform or proxy voters.

Holding the meeting behind closed doors should not be surprising, though not been able to ask questions live or propose new resolutions is unusual. This is after all a company which is boasting about its ability to help customers work in real-time remotely, but the same cannot be done for the Shareholders’ Meeting.

Orange should perhaps listen to its own advice as this is incredibly sloppy.

And while it might be logical to assume that more people working remotely would be a benefit to the telcos, the reality is somewhat different; these are businesses which are facing the same financial strain as the rest of the economy.

Thanks to COVID-19, enterprise customers are spending in a different way, scaling back investments on connectivity projects, while roaming revenues have been dented. Research from the Scope group suggests roaming revenues could decline by as much as $25.832 billion globally over the next nine months, though this is a pessimistic forecast.

For telcos who operate in popular tourist destinations, Orange being one of them, this may well create a notable dent in the spreadsheets.

What is worth noting is that financials also rarely match home broadband trends.

Data usage might be surging across Europe thanks to remote working, entertainment streaming, gaming and video conferencing trends, but this does not mean users are upgrading subscriptions. Many subscribers would already be on unlimited data broadband contracts in any case.

The telco industry is not suffering any where near as badly as some, retail or the airlines for instance, but it still has to be careful. The longer the outbreak continues, the further into the future revenues from 5G deployments can be realised. Revenues will continue to be eroded, as has been the trend for the last two decades, but the replacement fortunes are being pushed back.

Although Orange is one of the first to declare a cut to the dividend, it would surprise few if more telcos follow its lead. Investment banks are looking at the likes of BT, Telecom Italia and Telefonica wondering when the announcement of a dividend cut will actually be made. It seems to be a case of when not if for the majority of telcos.

Vodafone share price tumbles on dividend cut report

Share price in Vodafone has taken a 4.3% hit during the opening hours of trading as rumours over a cut in dividend emerge.

Although several telcos have veered away from the dangers of cutting a dividend, The Sunday Times is reporting Vodafone is on the verge of making the announcement. With fourth quarter results scheduled for tomorrow morning, the team only has a short period of time to fend off unwanted questions.

Vodafone is currently one of the most attractive investments in the FTSE thanks to higher than average dividend payments to investors, though that might all be about to change. Some analyst firms are suggesting the cut could be as large as 50%, taking the dividend down from 15 pence per share to 7.5 pence. At the time of writing, Vodafone’s share price had declined 4.53% from the closing price on Friday afternoon.

The Vodafone share price has been steadily declining over the last 12-18 months, though any more downward movement could take it to the lowest since the fallout of the financial crisis in 2008.

The cause of the dividend cut is most likely to be due to the demands of 5G deployments across Europe. Although Vodafone is in a very strong position in multiple markets across the continent, this creates a difficult position when it comes to funding the funds to fuel future-proof infrastructure investments.

The challenge which Vodafone is specifically facing is spectrum. With auctions in Italy and Germany set to push the price of spectrum further north, telcos in the markets will be scrapping and scraping to secure a war chest deep enough.

It might not be the most exciting part of the mobile connectivity segment, but spectrum is one of the most critical. The assets could potentially define the success of a telco in the future 5G world, and numerous executives have already bemoaned the process of securing the frequencies. Some are complaining of the scarcity, and others of the price. Spectrum is central to 5G plans, and it’s not cheap.

This current predicament has been predicted however. Back in January, RBC Capital Markets suggested Vodafone might be in a precarious position due to years of restructuring, M&A, as well as exposure in up-coming spectrum auctions.

“Its underlying markets remain ‘challenging’ and it has very little financial headroom despite synergies and cost cutting,” the investor note stated. “Vodafone has options with its towers but faces a threat from 5G spectrum. The dividend is unsustainable even before we consider a macro downturn.”

RBC estimated securing the relevant licences could cost Vodafone between €4.5 billion and €12 billion, and even suggested investors should sell Vodafone shares ahead of a potential dip.

These are of course rumours for the moment, though there is enough support to justify the dip in share price. Only tomorrow’s results will tell.

Vodafone Shareprice