Telefonica SA suspended its dividends, cut a revenue forecast and slashed compensation for top executives including Chief Executive Officer Cesar Alierta in its most drastic response to Spain’s three-year debt crisis.

Europe’s biggest phone company scrapped a 1.5 euro-a-share dividend for 2012 and will resume half of the payout toward the end of next year, the Madrid-based company said Wednesday, citing an “extremely challenging” economic environment. The move will save Telefonica an estimated 10.2 billion euros ($12.4 billion). Top managers’ total compensation will be slashed by 30 percent, and board members agreed to take a 20 percent pay cut.

Telefonica’s shrinking business in Spain, where one out of four is without a job, has put pressure on Alierta, 67, to conserve cash and accelerate asset disposals. Two rating companies have lowered Telefonica’s debt to the second-lowest investment grade since May. Competition with Carlos Slim’s America Movil SAB in Latin America has intensified in countries such as Mexico, threatening profitability in the region.

“This is the first time Telefonica cancels the whole dividend in its history as far as I know,” said Andres Bolumburu, an analyst at Banco de Sabadell in Madrid. “This set of measures should be enough and help soothe investors, even though the credibility of the company could be severely damaged.”

Worst Performer

Telefonica’s stock has slumped 35 percent this year through Wednesday, the worst performance among the 23 companies in the Bloomberg Europe Telecommunication Services Index, which has lost 7.7 percent. The shares added 0.3 percent to 8.66 euros Wednesday in Madrid. Telefonica made the announcement after the market close.

The company had forecast its 2013 per-share dividend to be at least similar to this year’s 1.50 euro level. Instead it will pay 75 cents in two tranches, in the fourth quarter of next year and the second quarter of 2014. The 10.2 billion-euro savings over two years assume some scrip dividends would be paid in cash.

Europe’s telecommunications companies had relied on their cash flows to sustain high dividend yields for investors. As the region’s sovereign-debt crisis deepens, operators from Telecom Italia SpA to France Telecom SA have announced dividend cuts. Royal KPN NV, the Dutch operator partly owned by America Movil, this week slashed its dividend forecast by 61 percent.

‘Exceptional Measure’

Calling the move a “one-time exceptional measure,” Telefonica said the plan would help it “immunize from debt markets liquidity conditions” by having debt maturities covered till the end of 2013. Net debt climbed to 58.3 billion euros as of June 30 from 56.3 billion euros at the end of 2011.

Among Telefonica investors who stand to miss the payouts are Banco Bilbao Vizcaya Argentaria SA, Spain’s second-biggest bank with an almost 7 percent stake, Barcelona-based CaixaBank SA with a 5 percent holding and BlackRock Inc. with about 3.8 percent, according to stock-market regulator CNMV.

Besides CEO Alierta, other executives taking a pay cut include Finance Chief Angel Vila, head of Europe Jose Maria Alvarez-Pallete and Latin America chief Santiago Fernandez Valbuena.

Spanish Economy Minister Luis de Guindos this month called on the nation’s biggest companies to rein in executive pay, saying a recovery from the economic crisis will be quicker if citizens feel sacrifices are shared evenly.

Operating Income

Second-quarter operating income before depreciation and amortization, or Oibda, dropped 6.6 percent to 5.35 billion euros from a year earlier, Telefonica said Wednesday. That compares with the 5.28 billion-euro average of 11 analyst estimates compiled by Bloomberg. Sales climbed 0.1 percent to 15.47 billion euros, also topping analysts’ projections.

Still, in Spain, revenue slumped 13 percent to 3.82 billion euros, while Oibda contracted 14 percent to 1.72 billion euros in the quarter. In May alone, Telefonica lost more than 204,000 mobile-phone lines in the country, bringing its market share to 38.04 percent from 38.24 percent in April, data from the CMT regulator showed.

Telefonica is struggling to compete with cheaper local competitors such as TeliaSonera AB’s Yoigo unit and Jazztel Plc. Spain will increase the most common rate of sales tax to 21 percent from 18 percent on Sept. 1, a move that may further curb spending on phone and Internet subscriptions.

For the full year, Telefonica now predicts revenue will be at least unchanged, compared with a previous forecast for more than 1 percent growth. The company confirmed its full-year Oibda target for a “lower margin decline” compared with the 2.1 percentage point shrinkage in 2011.

Two Decades

About $42 billion in acquisitions over two decades in Latin America, which culminated in the $10 billion takeover of Brazilian mobile operator Vivo Participacoes SA in 2010, made Telefonica the most acquisitive Spanish company in the region. Second-quarter revenue from the region climbed 5.8 percent to 7.45 billion euros. Oibda rose 0.7 percent to 2.66 billion euros.

Yet, as debt increases and demand for phone services in Spain shrank, CEO Alierta has to unravel that strategy. During the quarter, Telefonica sold a $1.4 billion stake in China Unicom (Hong Kong) Ltd. and announced plans to sell shares in its German and Latin American businesses.

“Telefonica is obsessed with strengthening its financial structure,” said Francisco Salvador, a Madrid-based strategist at FGA/MG Valores. “It’s a clearly defensive move that shows the fragile situation not only of Telefonica but of the whole Spanish market.”