In my previous article on Portugal Telecom (PT), I suggested that despite its high-dividend yield above 11% it could be a dividend trap. The company is heavily reliant on dividends received from its stake in Brazilian company Oi, to cover its own commitments. Oi announced, at the end of July, a dividend cut because it reached its maximum leverage target. As PT will not receive cash from Oi, its dividend was also seriously at risk. Indeed, the company announced today a review of its shareholder remuneration policy for 2013-2014:
Portugal Telecom, SGPS SA announces that its Board of Directors approved the modification of it shareholder remuneration policy for fiscal years 2013 and 2014, which will be exclusively comprised of a cash dividend of Euro 0.10 per share to be paid annually. The Board of Directors remains confident on the cash flow generation of the Company. Simultaneously, in light of current macroeconomic environment, of the financial market conditions and of the need to continue to invest in the development of its businesses, the Board of Directors has decided reinforce the prudency of its financial strategy. This decision, coupled with the sale of PT's equity interest in CTM recently executed and the recent bond issuance lead to a reinforcement of the Company's balance sheet and to a stronger financial flexibility.
I was expecting a dividend cut over the next few months, so I was a little surprised by the timing of this dividend cut. However, given the issues the company faces in Portugal and Brazil, this cut is hardly surprising. For income investors, this clearly shows that relying just on high-dividend yields is not enough to achieve good long-term returns. Based on the new dividend policy PT's current dividend yield is only 3.3%, so the appeal of a high-dividend yield is completely lost.
Regarding its quarterly results, Portugal Telecom's second-quarter operating revenues declined 5.5% compared to the same quarter a year ago, and its EBITDA declined by 13.8%. Its free cash flow was negative excluding the sale of its stake in CTM, net debt increased 1.3% to $10.2 billion, and its net-debt-to-EBITDA ratio was 3.6x compared to 3.3x a year ago. Given this weak set of results, it is not surprising PT has slashed its dividend to €0.10 ($0.13) for 2013 and 2014, compared to €0.33 ($0.43) related to 2012 earnings. This is a 70% cut, that allows the company to save about $265 million annually.
Portugal Telecom continues to face strong headwinds both in its domestic markets and in Brazil. Therefore, its weak operating trends should continue over the next few quarters, and a rebound is nowhere in sight. The major positive factor it had to attract investors, its high-dividend yield, is lost with the dividend cut announced today. Although it still yields slightly higher than the market's average, I think it is not enough to compensate the risks assumed by investors.