May 24, 2018 / 5:15 AM / 7 months ago

Deutsche Telekom promises to be dependable and deliver higher growth

LONDON (Reuters) - Deutsche Telekom (DTEGn.DE) pledged its business divisions spanning Germany, Europe and the United States would all show growth from next year and said it would tie dividends to rising bottom-line profits in future.

FILE PHOTO: Deutsche Telekom logo is seen during preparations at the CeBit computer fair in Hanover, Germany, March 19, 2017. REUTERS/Fabian Bimmer/File Photo

Europe’s largest telecoms firm announced the shift on Thursday ahead of a two-day investor conference, where it wants to win buyers back to a stock that has declined 10 percent this despite yielding nearly 5 percent.

Hiking the dividend will require Deutsche Telekom to deliver on its growth promise — including fixing its troubled IT services unit T-Systems — while capping capital investment and curbing costs.

“We might be a bit boring, a bit German,” CEO Tim Hoettges told reporters as he pitched the new four-year plan. “When Deutsche Telekom says it will do something, we do it.”

The Bonn-based company, in which the German state still owns a 31 percent stake, said it expected revenues to rise by 1-2 percent per year from 2017 to 2021, adjusted core profits by 2-4 percent and free cash flow by 10 percent.

That is in line with the last mid-term guidance it issued for the period covering 2014-18 and which it has, on most metrics, surpassed.

Hoettges said Telekom would focus on its ‘footprint’ in Europe and the United States, with acquisitions a legitimate way to drive growth in its core business.

Telekom will also keep its options open on T-Systems, whose classic IT outsourcing business is struggling. “I don’t rule out a partial sale,” he said, adding that it was vital to settle on the right owner and right strategy.

THE BOTTOM LINE

Telekom plans to pay a dividend for the current business year of 0.70 euros ($0.82), up from 0.65 euros last year, driven by growth in free cash flow.

Thereafter, payouts would be tied to adjusted earnings per share that are expected to rise to 1.20 euros in 2021 from 1.00 euro this year.

Chief Financial Officer Thomas Dannenfeldt said the change better reflected Deutsche Telekom’s ownership of earnings from its U.S. operations and was made in response to market feedback.

The mid-term plan does not include T-Mobile’s proposed merger with Sprint (S.N) - a deal that would bulk up Deutsche Telekom’s group revenues to put it almost on a par with the U.S. market No.2 Verizon (VZ.N).

Assuming the deal closes in early 2019, the impact on Deutsche Telekom’s earnings and free cash flow would be negative through 2021 and accretive thereafter. It would also generate estimated synergies with a net present value of $43 billion, the company estimates.

Telekom said it would also consider buybacks - either of its own stock, or by increasing its stake in U.S. unit T-Mobile (TMUS.O). It would take the latter route if the merger doesn’t pan out and T-Mobile proceeds with buybacks of its own that have already been announced.

In its home market, Deutsche Telekom will focus on building out its broadband network and rolling out fifth-generation mobile services. Auctions of 5G mobile spectrum will be held in early 2019.

Deutsche Telekom has been criticized for relying too much on connecting homes to the internet through ‘vectoring’, which involves a tweak to the old copper-wire telephone network to boost bandwidth.

It said it would provide super-fast fiber connections to up to 2 million households a year from 2021, as well as fast wireless-to-the-home connections to around one quarter of German homes.

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The company said its investments had peaked and would stabilizes going forward, while it would achieve 1.5 billion euros in cost savings outside the United States through 2021.

The company’s shares traded down 1.3 percent while Germany’s blue-chip DAX index .GDAX was broadly stable.

Reporting by Douglas Busvine; Editing by Victoria Bryan and Richard Pullin

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