Cunliffe hurts Telecom with dividend hint

David Cunliffe

Telecom shares plunged further yesterday after Communications Minister David Cunliffe suggested the company might have to cut its dividend to boost investment.

He said Telecom's investment levels had not been high relative to its dividend flow.

Greater competition and increased investment "may mean on the part of shareholders that they need to accept that in the short run there may be somewhat lower dividend flows or lower returns", he told news agency Bloomberg.

The comments sent Telecom shares down a further 8c to $4.39, wiping $157 million off its market capitalisation. The shares have fallen more than 20 per cent from $5.55 since May 3, when the Government announced it would open the company's phone lines to competitors. Telecom has lost $2.2 billion in market capitalisation since the announcement.

Cunliffe's comments also caused an outcry among senior figures in the investment industry who believed it was not appropriate for him to comment on a company's dividend policy.

Telecom chairman Rod Deane said he had not given Cunliffe any indications of the company's dividend plans and the minister's comments appeared to have been speculation.

However, Telecom did not deny it would cut its dividend.

It said it would update the market on its plans no later than its fourth-quarter earnings briefing in August. It repeated that it would provide an update on the business implications of the regulation, including 2006-07 capital expenditure plans, by late June.

A spokesman for Cunliffe said the minister was not trying to influence dividend plans and that any such decisions were for Telecom's board.

The comments had been taken out of context. "The interview was a long one in which the minister was asked a wide range of questions on public and industry reaction to the recent broadband policy announcements."

Telecom's dividend is about four times the industry average after being raised last year to 85 per cent of earnings from as low as 50 per cent in 2003.

The stock has been a favourite because of its high yield, which is about 16.5 per cent based on its gross dividend payments in the past 12 months. That compares favourably with an average yield of 4.2 per cent for the 89 stocks in the Bloomberg World Telecommunications Index.

Some analysts say the dividend is the key factor keeping the stock from dropping further and if it is cut shares could plummet even more.

"With the attractive yield representing the only meaningful positive for the stock, such an action would, in our view, see the share price track to more fundamental levels," said Goldman Sachs JBWere analyst Andrew White. A cut was imminent because a high-dividend policy was inconsistent with the Government's new regime.

"We believe any change in behaviour by Telecom will have to incorporate a lower dividend setting to placate Government."

First New Zealand Capital chief executive Scott St John said comments like the minister's caused uncertainty and, as a result, limited Telecom's ability to raise funds. In turn, this frustrated the Government's own objective of encouraging investment in telecommunications infrastructure.

"It is outrageous that a Government minister is commenting on the dividend policy of a listed company, particularly at a time when its operating regime is under review. His statement reflects very poorly on New Zealand as an investment destination."

ABN Amro head of research James Miller said the comments were "disappointing and unnecessary".

National's finance spokesman, John Key, called on Prime Minister Helen Clark to rebuke Cunliffe. "This is not a step too far, it is a gigantic leap too far."

Key said the comments did nothing to engender confidence in the market.