By Najat Kantouar

Telefonica shares dropped after the company said it plans to halve its 2026 dividend, a move aimed at reducing costs and cut debt as part its new chief executive's turnaround strategy.

The Spanish telecommunications group has been reducing its exposure to Latin America through successive sales of its Peru, Uruguay and Ecuador units and of its stake in Telefonica Argentina since Marc Murtra became chair and chief executive in January. Meanwhile, Murtra has voiced appetite for greater consolidation among European telecom operators and for bolstering the group's exposure to defense.

Telefonica on Tuesday signaled it is ready to seize consolidation opportunities that might arise over the next five years, saying that lack of consolidation in the Europe telecom market led to inefficient investment compared with the U.S. and China and greater tech dependence in critical areas.

Dealmaking isn't included in Telefonica's new targets, but the company said its financial strategy is based on cash flows coming from more predictable operations and a more disciplined approach to spending priorities that puts investment in operations and debt reduction before dividends. Recent business sales have honed the group's focus on four core markets--Spain, Germany, the U.K. and Brazil.

The company said it would cut dividends for 2026 to 15 European cents (17 U.S. cents) a share from 30 European cents for this year. Dividends for 2027 and 2028 will be based on a 40% to 60% ratio of free cash flow after investments, it said.

In morning European trading, shares fell as much as 11%, wiping out gains earlier in the year. This would be the stock's worst one-day percentage fall since March 2020, at the onset of the Covid-19 pandemic, if maintained until close, according to FactSet data.

The dividend cut at Telefonica means the company is diverging from peers like France's Orange and the Netherlands' Royal KPN, which are boosting payouts as a result of lower investments, AlphaValue analyst Jean-Michel Salvador wrote in a research note.

Telefonica said it is looking to invest in artificial intelligence and other technologies, with the goal of boosting its consumer and business-focused operations, and to tap into opportunities in cybersecurity and defense.

For the 2025-28 period, the company is targeting revenue growth at an average annual rate of 1.5% to 2.5%. It expects this to accelerate to 2.5% to 3.5% for 2028-30, with adjusted earnings before interest, taxes, depreciation and amortization anticipated to be in line with revenue over both periods.

Telefonica outlined the targets as it reported an increase in third-quarter net profit to 276 million euros from 3 million euros in the year-earlier period, and said it was on track to meet its full-year guidance. Results for the year-earlier period took a hit from a writedown in Peru and currency swings.

Adjusted Ebitda rose 1.2% organically to 3.07 billion euros, while revenue fell to 8.96 billion euros from 9.10 billion euros.

Analysts expected revenue at 8.95 billion euros and adjusted Ebitda at 3.04 billion euros, according to a company-compiled consensus.

Write to Najat Kantouar at najat.kantouar@wsj.com

(END) Dow Jones Newswires

November 04, 2025 05:02 ET (10:02 GMT)

Copyright (c) 2025 Dow Jones & Company, Inc.