Deutsche Telekom changes its dividend policy, invests more and wants to grow

On February 22, Europe’s largest telecommunications company, Deutsche Telekom, released the figures for the fourth quarter of 2017 as well as for the full year 2017. The biggest secret right away: Whether CEO Tim Höttges performed in the John Legere outfit , I can Unfortunately not say, since I have heard only sound recordings of the analysts conference.

Irrespective of this, there was exciting news: the dividend policy is being changed, investments are being further increased and the company wants to continue to grow moderately. Unfortunately, nothing was reported about the future of T-Systems, but referred to the upcoming Capital Market Days in May.

Even more investments
In his letter to shareholders, Tim Höttges introduced the year 2017 under the motto: “We are expanding!”. 12 billion euros, which were invested in the network in 2017, after all, 1 billion euros more than a year earlier, underline this exclamation. In addition, another 8 billion euros were spent on mobile radio frequencies in the USA.

Despite these high investments, free cash flow rose to 5.5 billion euros. Free cash flow represents the other financial resources available to a company after deducting all necessary investments. With this, Telekom is serving its exorbitant mountain of debt and distributing dividends to its shareholders. However, the investments in mobile radio frequencies are not included in the calculation of free cash flow at Deutsche Telekom.

Although the company’s net debt increased despite this, but if this net debt is placed in relation to EBITDA (earnings before interest, taxes, depreciation and amortization), then the leverage ratio remained constant at 2.3 compared to 2016 and thus within the target corridor of 2.0 to 2.5. Another good sign that the investments are being made meaningfully is the slight increase in return on capital employed (ROCE) to 5.8%.

For the coming years, too, everything at Telekom is expanding. In 2018, investments are set to increase again to 12.5 billion euros. Mainly, of course, in the further expansion of the network infrastructure. But according to Höttges, 100 million euros are also due to the increasing expansion of the tower infrastructure. The speed of expansion is set to quadruple with 2,000 new towers in 2018 compared to 2017. Telekom also likes to grant its direct competitors access to these towers, if it makes sense.

Of course, these investments must translate into increased revenues and free cash flows. Otherwise, the current debt burden will eventually be a problem . But here too, the German Telekom was optimistic.

Further growth
The year 2017 was quite successful with regard to the financial key figures and fits in very well with the goals that Deutsche Telekom has set itself in the period from 2014 to 2018:

measure – Target size 2014 – 2018 Growth 2017
revenues = 1% – 2% per year + 2.5%
adjusted EBITDA = 2% – 4% per year + 3.8%
Free cash flow approx. = 10% per year + 11.3%

For the year 2018, too, the management expects the self-imposed goals to be exceeded. Revenues are expected to increase slightly, adjusted EBITDA to grow by 4.5% and free cash flow to grow by as much as 12.7%.

The new dividend policy
The simple and good news for all dividend hunters is the increase in the dividend by as much as 5 cents per share to now 65 cents per share. At the current share price this gives a clear dividend yield of around 5%. Not bad compared to the average dividend yield.

The dividend payment in 2018 brings yet another change. So far, shareholders have been given the choice each year: dividends in cash or the dividend in the form of new shares. Every year, Deutsche Telekom has therefore carried out a capital increase provided that investors were able to pay out the dividend in new shares. On the other hand, the shares of shareholders who opted for the cash dividend were watered down from year to year.

But that’s the end of it. The dividends in 2018 are available only in cash, a choice is no longer offered. According to Höttges is simply the reason for the then introduction of the optional dividend distribution in the form of shares no longer. This was introduced to provide more financial resources for the US business turnaround. However, since T-Mobile US can now finance itself and even has money left for a share buyback, this reason does not apply.

In addition to the continuing strong investment activity already described, this is another issue that will raise capital requirements in 2018. Let us surprise ourselves, as Deutsche Telekom strikes in 2018.