In the past, telecom stocks were considered the quintessential year-end dividend plays. They were less sensitive to economic cycles and had steady cash flow, so the saying "when the cold wind blows, buy telecom stocks" followed as a matter of course whenever prices corrected. But this year, with all three mobile carriers exposed to hacking setbacks, that formula is wobbling. Expectations for dividends are not as high as in previous years.
According to the industry on the 26th, all three carriers—SK Telecom, KT and LG Uplus—are suffering from hacking issues, weakening year-end dividend expectations. In particular, SK Telecom's declaration to suspend third-quarter dividends served as a signal. Since SK Telecom introduced quarterly dividends in 2021, this is the first time it has not paid. SK Telecom Chief Financial Officer Kim Yang-seop said on the third-quarter earnings conference call, "Due to an unprecedented deterioration in financial results, we decided not to pay dividends for the third quarter."
In fact, due to the fallout from a hacking incident that erupted in Apr., SK Telecom's third-quarter operating profit came to about 48.4 billion won, plunging 90.9% from a year earlier. With a 1 trillion won customer compensation program to be pursued by year-end, the expense burden is expected to continue. Accordingly, both inside and outside the industry, there is talk that the implementation of fourth-quarter dividends is uncertain.
KT also cannot rest easy. If the fallout from the unauthorized small-amount payment hacking incident in Sept. is fully reflected in fourth-quarter results, concerns are growing that there could be changes to the dividend policy. Some analysts say it is premature to buy KT shares expecting dividends when the government's final investigation results have not yet been announced. LG Uplus is also under government investigation, making it burdensome for investors to buy for dividend purposes. A telecom industry official said, "If you buy KT or LG Uplus shares for dividends and the hacking probe results are unfavorable, or additional negatives like penalty surcharge or waiver of penalties emerge, you could suffer losses from a share price drop," adding, "That is why interest in telecom stocks as year-end dividend plays has waned recently."
A bigger problem is that telecom stocks, once seen as "dividend stocks that guarantee stable returns," could now be perceived as "stocks where dividends can be cut." There are also concerns that the carriers' "value-up story," which has supported their share prices through corporate value enhancement and share cancellations, could be derailed by the hacking aftershocks.
A similar case is U.S. carrier AT&T. A flagship dividend stock, AT&T lowered its payout ratio from 60% to 40% in 2021 as its liability burden grew after the WarnerMedia acquisition, and in 2022 it cut its per-share dividend from $2.08 to $1.11, nearly in half. As its "dividend stock" image wavered, the share price fell from $25 in May 2021 to $13.4 in July 2023. It was only this Feb. that the share price recovered to $25, taking more than four years.
Kim Kyung-won, an endowed professor in the business administration department at Sejong University, said, "Because of the 'signal effect (the phenomenon where how a company pays dividends is interpreted as management's 'message' about the company's future performance and cash flow),' once trust in dividends is broken, it takes a long time to recover the share price," noting, "SK Telecom, with solid cash holdings, abruptly suspending dividends appears to have been a decision focused only on immediate profits." On a consolidation basis in the third quarter, SK Telecom's cash and cash equivalents amounted to 1.3847 trillion won.