Europe's telecom shares have long been seen as safe houses when the wolf is at the door, but recession, fierce competition and costly network upgrades are huffing and puffing at their capacity to pay generous dividends.
The first walls came down when Telefonica and Telekom Austria cut their dividends in December, breaking a taboo in a sector that has compensated investors for low growth with high dividend yields.
Now analysts say KPN, France Telecom, Telecom Italia and Portugal Telecom could be next to cut payouts for this year or next.
With lower dividends, the traditional operators, especially the former state-owned monopolies saddled with high costs and debt, have little left to woo equity investors.
Unlike U.S. peers such as AT&T and Verizon, Europe's telcos have not yet managed to translate consumers' growing appetite for smartphones and tablet computers into profit. Competition is pushing mobile prices down in many markets, while the need to invest heavily in fiber broadband buildouts and new fourth generation mobile networks is pressing.
The sector is looking at a slow decline over time, so it's hard to consider that a safe haven, said Bruno Grandsard, a portfolio manager at Axa Investment Management.
If the world is falling apart like 2008 after Lehman Brothers collapsed, then sure, you own them, otherwise I don't see any of the big telecom incumbents as an attractive proposition.
European stock performance by sector:
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MADE OF BRICK
To be sure, some companies in the sector still have something to offer, including growth-oriented shares like France's new mobile entrant Iliad and cable operators like Kabel Deutschland.
But among the big telcos, only Vodafone and Telenor seem made of brick, fortified by their growth in the emerging markets of Asia and Africa, and the relative strength of their European units. Both have been increasing dividends in recent years and aim to keep doing so.
Overall, European telecom sector shares are trading near 10-year lows. The sector's 12-month forward price-to-earnings ratio is 9.5, compared with 9.9 for utilities, 11.4 for healthcare and 14.7 for consumer goods.
Meanwhile, the sector's average dividend yield is at 7.2 percent, a high not seen since 1987, and more than double the average yield for the broader European market.
While such high yields may seem attractive at first blush, they are a product of weak valuations, which are paradoxically a sign that investors no longer believe in the companies' ability to keep paying bumper dividends.
Investors looking for places to ride out market shocks are increasingly preferring other defensive sectors, such as healthcare or food and beverages (F&B). In the past year, European telecom shares have fallen 10.3 percent, while healthcare has risen 13.2 percent and F&B is up 7.2 percent.
Societe Generale recently downgraded the sector and upgraded healthcare, saying the latter would be more resilient in a recession, with dividends less at risk than those of the telcos.
Europe's deep sovereign debt crisis is aggravating matters for the telecoms majors, with the risk of higher taxes from cash-strapped governments, austerity measures taking cash out of the hands of consumers, and rising debt costs.
Operators in Italy, Spain, Portugal and Greece in particular have seen borrowing costs rise as credit conditions tighten.
Telecom operators have long been able to raise large amounts of debt on bond markets at relatively favorable rates because of their steady cash flows, and so tend to be highly leveraged.
Now investors are directly linking telecom operators to their respective country's credit rating.
Stuart Reid, analyst at Fitch Ratings, said Telefonica, Telecom Italia and Portugal Telecom would face higher borrowing costs on bond markets until credit pressure on their home countries subsides.
The cost of insuring Telefonica's debt has jumped 30 percent since mid July. Telecom Italia's is up 39 percent. France Telecom's up 70 percent. Portugal Telecom's, already very high, has risen 12 percent.
If Portugal Telecom and Telefonica had their headquarters in Germany, their funding costs would be so much lower, said Reid. Their borrowing costs are being driven by events outside their control and are not linked to the underlying business.
Many credit analysts and investors saw the dividend cut at Spain's Telefonica as long overdue, as it was paying out all its free cash flow in dividends.
KPN could be next to trim shareholder returns, though not because of debt contagion from its home base, the relatively healthy Netherlands.
Like Telefonica, KPN was an investor darling in recent years, lauded for its strict cost controls on everything from networks to marketing costs and its policy of returning all its free cash flow to shareholders via dividends and huge annual share buy-backs.
But that model has left KPN unprepared for intensifying competition in the Dutch market, analysts say, causing its revenues, profits and market share to slip.
They've long underinvested in the domestic business, said Jonathan Dann, analyst at Barclays. It's like they ran their car on turbo boost for years without putting oil in it.
France Telecom, which faces a bruising price war brought on by new mobile operator Iliad, has returned roughly half of its free cash flow to shareholders in recent years. But it has been among the worst-performing telecom stocks because of increasing competition in its key home market.
The question of what happens to dividends in our sector is a real one and is being asked by many, France Telecom's Chief Financial Officer Gervais Pellissier said in an interview.
We always knew the arrival of the fourth operator would put pressure on our cash generation, and it is more intense than we thought it would be a year ago.
In May, France Telecom pledged a 1.40 euros per share dividend in 2011 and 2012, and said it would aim for stable dividends after that. Its dividend yield now stands at 12.2 percent, nearly double the sector average.
Some might call that a house of straw.
(Additional reporting by Vincent Flasseur, Alexandre Boksenbaum-Granier, and Blaise Robinson; Editing by Will Waterman)