(Bloomberg) -- Futures traders are bracing for Telefonica SA to cut its dividend, a measure that would preserve cash at the debt-laden Spanish phone carrier and bolster its credit rating after plans to sell the company's British wireless unit fell through.
Contracts that measure investor sentiment toward Telefonica's planned 75 euro-cent dividend for 2016 declined 4 percent on Monday, the most in three months, while a futures contract on the 2017 payout, which hasn't been set, has slumped 8.5 percent since June 23, when British voters decided to leave the European Union.
Chairman Jose Maria Alvarez-Pallete is open to reducing dividend payments if it's necessary to preserve cash, pay down the company's 50.2 billion euros ($55.9 billion) in debt and keep its investment-grade credit rating, according to a person with direct knowledge of the matter. His options are narrowing to make good on a pledge to maintain Telefonica's debt rating, without resorting to a fire-sale of assets.
No decision has been made, according to the person, who asked not to be named discussing private deliberations. A Telefonica official declined to comment.
This month could be pivotal. Telefonica scrapped its dividend once before in recent years, in July 2012, when the Madrid-based company faced a financial crisis in Spain. The options this time include less-drastic measures like reducing the remaining amount for this year or next, or paying shareholders in scrip, a substitute for cash like stock for example.
The company set the 75 cent plan for 2016 in February. It hasn't yet set a record or pay date. It typically pays in two installments, in November of the earnings year and the following May.
Telefonica fell as much as 1.2 percent and declined 0.1 percent to 8.66 euros at 3:28 p.m. in Madrid, giving the company a market value of about 43 billion euros.
The dividends are in the spotlight following an announcement last week that Telefonica was shelving the sale of its British unit until market conditions “are right.” Telefonica had first planned to use proceeds from a 10.25 billion pound ($13.6 billion) sale of O2, but that plan was blocked by EU regulators in May.
The planned payout for this year would cost the company about 3.7 billion euros. On May 12, the day after the O2 sale was blocked, Pallete said Telefonica was still committed to paying the full 75 cents, though part could be paid in scrip.
The decision got more complicated when the Brexit vote roiled financial markets, thwarting backup plans for a new sale or an initial public offering of O2. A plan to sell shares of Telefonica's infrastructure unit Telxius was delayed.
Moody's Corp. has threatened to downgrade Telefonica's current Baa2 rating, which is two levels above junk, if the company doesn't come up with a solid de-leveraging plan by the end of the year.
The futures price on Telefonica's 2016 dividend was down to 72 cents in Madrid from 75 cents, where it stood on Friday. Contracts on 2017 dividend have dropped to 54 cents from 59 cents ahead of the Brexit vote, according to data compiled by Bloomberg.
Dividend futures are derivative contracts that allow investors to take positions on future dividends, pocketing the difference between the amount paid and the actual amount.
--With assistance from Kornelija Dauksaite To contact the reporters on this story: Rodrigo Orihuela in Madrid at rorihuela@bloomberg.net, Manuel Baigorri in London at mbaigorri@bloomberg.net. To contact the editors responsible for this story: Anthony Palazzo at apalazzo@bloomberg.net, Kim McLaughlin
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