TEF Telefonica SA

By Jeannette Neumann and Ana García Ruiz 

Telefónica SA's shares led losses on Spain's benchmark index Thursday as investors eager for details on how the company plans to whittle down its debt load largely came up empty-handed when it reported second-quarter earnings.

The Spanish telecommunications giant also reaffirmed its dividend for 2016, despite calls from analysts to cut the payout to help trim more than EUR50 billion ($55.3 billion), in debt.

Telefónica executives assured analysts during a presentation that strong free cash flow would help the company stay apace of its debt pile. Executives also said they were also considering issuing a type of bond that doesn't fully count as debt.

Telefónica shares were down 4.7% in midafternoon trading in Madrid despite results that were broadly in line with what analysts had expected. The decline comes after a steady increase in Telefónica's share price over the past month.

The company reported net profit was EUR693 million in the quarter versus EUR1.52 billion a year earlier and said that a decline in the currencies of Brazil, Argentina and the U.K. against the euro, as well as other currency fluctuations, had shaved 9.1 percentage points off revenue in the quarter.

Revenue was EUR12.72 billion, a 7.7% decline from a year earlier. Operating income excluding depreciation and amortization was EUR3.92 billion, a 7.1% drop.

Investors have been seeking reassurance that Telefónica plans to pick up the pace on paring debt after the European Commission blocked the company's sale of its British mobile operator O2.

Telefónica had tried to sell O2 to cut its debt load, but the Commission said the acquisition by CK Hutchison Holdings Ltd. would have resulted in higher prices and fewer choices for U.K. customers.

Analysts at credit-rating firms warned that Telefónica still needed to trim debt or risk a potential downgrade of its investment-grade credit rating.

As Telefónica executives went back to the drawing board to figure out what to do with O2, Britons voted to leave the European Union. The following week the telecoms company announced it would consolidate the British operator back into its financial statements.

Telefónica executives said Thursday the company was weighing its options with O2, such as a minority divestment or a private transaction.

But the U.K. vote to leave the EU hasn't been all bad for the company. Kepler Cheuvreux analyst Javier Borrachero noted in a July 11 report that around 13% of the company's net debt is in sterling and the currency has dropped around 9% against the euro following the June 23 referendum.

The Brexit vote has also pushed back expectations of an increase in interest rates by the U.S. Federal Reserve, which has helped to buoy emerging market currencies such as the Brazilian real.

Investors tend to pull money out of emerging markets if they believe there will be higher interest rates, and therefore higher returns, in the U.S.

Since that hasn't happened, the Argentine peso and the Brazilian real--which had been a drag on earnings and Telefónica's share price--have bounced back, while more market-friendly governments in the region are also helping to brighten the outlook for the telecommunications company, Mr. Borrachero said.

"An increasing appetite for emerging markets risk is key for Telefónica, as the stock is still seen as a Latin American proxy," he added.

On the other hand, if the Fed raises rates and that in turn deflates emerging-market currencies, Telefónica's valuation could suffer.

Write to Jeannette Neumann at jeannette.neumann@wsj.com

(END) Dow Jones Newswires

July 28, 2016 10:56 ET (14:56 GMT)

Telefonica (NYSE:TEF)
Historical Stock Chart
From Mar 2024 to Apr 2024

Telefonica (NYSE:TEF)
Historical Stock Chart
From Apr 2023 to Apr 2024