Deutsche Telekom's full year net revenue increased 6.4% to €80.5bn - excluding the impact of currency movements and acquisitions that represents a 2.8% rise. Adjusted cash profits rose 4.2% to €24.7bn on the same basis, with positive contributions from all operating segments.
The group recommends a dividend of €0.60 per share, in line with the new policy which ties dividend payments to earnings per share, subject to a €0.60 floor.
The shares rose 2.0% in early trading.
Deutsche Telekom (DT) is already a massive telecoms provider, and management are intent on making it bigger still.
The group's largest operating segment is essentially its majority stake in T-Mobile US, the third largest mobile provider in the United States. The group's looking to acquire rival network Sprint, and due to the size of the deal regulators have had a close eye on it. Recent developments have been encouraging, but investors shouldn't count their chickens just yet.
The deal has much to recommend it. Sprint's been struggling, but it owns a large chunk of valuable mid-band spectrum. If all goes to plan, the combined group could have both the bandwidth and scale needed to take on Verizon and AT&T in the US 5G market.
However, telecoms is a difficult industry to do well in.
Firstly, building and maintaining modern communications infrastructure, like towers, cables and data centres, costs a fortune. Add the ever increasing payments to governments for spectrum rights, and the capital requirements of the business become truly eye watering. In 2019 alone Deutsche Telekom spent EUR14.4bn in cash on investments and spectrum.
Secondly, the industry lacks pricing power. Many consumers simply pick the cheapest provider, and there aren't many ways to offer something meaningfully different. As a result, telcos compete primarily on price, which leads to pretty feeble margins and meagre returns on the massive amounts of capital employed.
Debt has mounted as a result and efforts to keep it in hand have led management to trim the dividend. The stock now offers a prospective yield of around 4.2%. Longer-term, the group has adopted a policy of linking the payout with earnings, which could make it volatile if things don't go as planned.
The group's fortunes are largely dependent on the Sprint merger. We think the strategic rational makes sense, but executing is another matter. If all goes smoothly the combined group could be formidable and the payout could rise, but if not the group may struggle beneath its capital requirements and debt load.
Full Year Results (constant currency)
US revenue rose 5% to €40.4bn, driven by an increase in branded customer service revenues. Adjusted cash profits rose 4.7% to €11.1bn. The positive revenue movement was partially offset by higher staff and outsourcing costs.
In Germany revenue rose 0.9% to €21.9bn, primarily thanks to a 2.4% increase in the mobile business. Higher broadband and IT revenue almost offset the decrease in fixed-network revenue. Adjusted cash profits rose 2.4% to €8.7bn, mainly due to lower staff numbers.
Europe generated €12.2bn of revenue, an increase of 1.4% year on year. The fixed network business was the biggest driver of growth, and strong performances in Greece, Romania, Austria and the Czech Republic offset weakness in Poland. Adjusted organic cash profits increased 3.1% to €4.0bn.
Systems Solutions adjusted cash profits increased 17.4% to €519m. Group Development adjusted cash profits rose 15.8% to €1.0bn.
Net debt at the end of the quarter stood at €76.0bn, an increase of 37.2% over last year. This is largely the result of accounting changes, but also includes dividend payments and spectrum acquisition costs. Free cash flow after lease payments but before dividends and spectrum costs was €7.0bn.
A US judge recently ruled favourably on the merger between Deutsche Telekom's US arm, T-Mobile, and Sprint. However, further regulatory approval is still required.
The group expects adjusted cash profits of around €25.5bn in 2020, based on an expected rise in revenue paired with planned cost savings.
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