Saudi Telecom’s share surge raises prospect of PIF stake sale

Iurii Golub/Alamy via Reuters Connect

• STC stock at 13-month high
• 38% increase on current dividend
• Analysts ‘encouraged’ by news

Saudi Telecom Co’s surprise dividend increase announcement has propelled its stock to a 13-month high and increased the likelihood that majority shareholder the Public Investment Fund may sell some of its stake in the former telecom monopoly.

On Sunday, STC said it would pay SAR0.55 ($0.15) per share each quarter for three years starting from the final quarter this year.

That represents a 38 percent increase on its current three-year dividend programme of paying SAR0.40 per quarter, which will end with the third quarter of 2024.

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“It’s a good sign as it assures a certain yield and attracts investors looking at reasonable, regular income,” says Nishit Lakhotia, head of research at Bahrain’s Sico Bank.

The new dividend programme is subject to shareholder approval, although the state-run PIF owns 64 percent of the company so this is just a formality.

Following Sunday’s announcement, STC’s stock surged 9.9 percent to SAR43.70 before retreating slightly to SAR43.30 by mid-Tuesday. Despite this surge, the shares are down about 20 percent from a September 2021 peak.

STC

“There’s still the possibility of the PIF offloading a further stake of STC in the open market and now it can get much better pricing for a stake sale given the market cheer for the higher minimum dividends,” says Lakhotia.

According to Neetika Gupta, head of research at Muscat’s Ubhar Capital, STC’s new dividend programme aims to “provide shareholders with a stable and predictable cash flow every quarter”.

“The announcement has surprised the market positively, including us,” she says. “We’re encouraged with this announcement as it indicates the company’s confidence in its upcoming free cash-flow generation.”

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As well as its regular payouts, STC also paid a special dividend of SAR1 per share for its 2023 financial year, distributing an extra $1.3 billion to shareholders.

In Sunday’s announcement, the company said it may pay additional, special dividends depending on “the company’s financial position, future outlook, strategic investments and capital expenditure requirements”.

STC, whose second-quarter profit rose 11 percent year on year to $881 million, has agreed a complicated deal with PIF to create a new company that will own and operate the two entities’ 30,000 telecom towers. STC will receive an estimated $2.3 billion from the PIF.

Both Gupta and Lakhotia say STC may pay an extra dividend following the completion of the tower deal.

Increasing yield

STC’s dividend yield under the new programme is 4 percent based on its current share price, according to Ubhar Capital calculations. This would increase to 6.3 percent if STC were to again pay a SAR1-per-share special annual dividend.

UAE telecom operator e& (formerly known as Etisalat) has a dividend yield of 4.9 percent, while Qatari rival Ooredoo’s is 5.6 percent, Ubhar Capital estimates.

STC has upped its dividends despite seeking to expand abroad again. Last September, the company paid $2.3 billion for 9.9 percent of Spain’s former telecom monopoly Telefonica, funding this acquisition through bank debt and cash reserves.

STC’s net debt was $7.7 billion at the end of 2023, up from $4.3 billion a year earlier, according to S&P Global data.

“We are actively pursuing expansion both within Europe and beyond, and there are a lot of discussions and opportunities, but we are very selective in making sure that anything we acquire has to add value in terms of margins and free cash flow,” STC executives told an analysts’ call on July 25.