Deutsche Telekom To Cut Dividend By Almost A Third

| About: Deutsche Telekom (DTEGY)
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Earlier this week, Deutsche Telekom (OTCQX:DTEGY) announced that it is to cut its dividend by almost a third in 2013 and 2014 in order to boost competitiveness in both Germany and the US.

Until now, Deutsche Telekom, has, with Vodafone (NASDAQ:VOD), avoided any such cuts, thanks to cost controls and a relatively robust home market.

For the years 2010-2012 Deutsche Telekom kept its promise to pay an annual dividend of at least 0.70 euros ($0.90) per share. The German operator has now announced that it will pay a dividend of EUR 0.50 ($0.64) per share for 2013 and 2014, down from EUR 0.70 last year.

Deutsche Telekom's dividend cut is in stark contrast to Vodafone, which not only maintained its dividend but has also increased it. Nevertheless, a dividend cut at Deutsche Telekom had been on the cards for some time following similar moves from rivals Telefonica (NYSE:TEF) and France Telecom (FTE), earlier this year.

Much of the dividend cut will be diverted to capital investment in Germany itself where the operator intends to spend between EUR 4.1-4.5 billion ($5.3 - 5.8bn) per year during 2013-15; including to roll out of its high-speed fixed broadband network that should help Deutsche Telekom to counter the increasing fixed-line threat of cable television networks, such as those operated by News Corporation's (NASDAQ:NWS) controlled SKY Deutschland (OTC:SKDTF), Liberty Global (NASDAQ:LBTYA) and Kabel Deutschland (KD), as well as to increase its 4G coverage to 85 percent of the German population within three years.

In the US, in the meantime, following the acquisition of MetroPCS and its expected subsequent merger with its T-Mobile USA unit, Deutsche Telekom plans to invest almost $39 billion in the next three years.

T-Mobile USA also announced a long-awaited deal with Apple (NASDAQ:AAPL) for it to start offering the iPhone next year, with the prospect of countering some of the loss in customer numbers during the past few quarters because it could not offer the iPhone.

In conclusion

As a long-term dividend income investor I abhor dividend cuts. So, I won't be considering Deutsche Telekom anytime soon. In comparison to Vodafone, its recent dividend trajectory is far superior.

In particular, the special dividends from Vodafone's joint venture Verizon Wireless have boosted payments to shareholders to a level that Deutsche Telekom shareholders can only dream of. These are also likely to become more regular as confirmed by its chief financial officer, Andy Halford:

"As long as the business develops in the way it has recently there is reason to believe that the shareholders will receive significant sums in the future,"

With its November interims, while I would have preferred a special dividend in cash, Vodafone reported a planned £1.5bn share buyback, reducing the number of shares in issue, and, thereby assisting the group with the possibility of paying higher dividends in the future.

Disclosure: I am long VOD. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: We run the Dividend Income Portfolio, which owns a shareholding in Vodafone Plc, purchased when the share was historically undervalued as per our valuation methodology. Currently, Vodafone is neither undervalued nor overvalued.