Shareholder Remuneration Policy

Starting in 1998, Telefónica changed its shareholder remuneration policy, replacing cash dividend payments with bonus issues. These operations were charged against free reserves and recognized shareholders' the right to receive, free of charge, one new share for every fifty shares held.

On July 24th 2002, Telefónica S.A. announced its commitment to restate cash dividend distributions as direct remuneration to shareholders. Consequently, approval was given at the General Shareholders' Meeting held on April 11 2003 for the payment of a gross cash dividend of 0.25 euros on all outstanding company shares.

Complementary to the payment of dividends, the company has set the acquisition of its own shares as an alternative formula to remunerate its shareholder base, selectively and depending on the pace of cash flow generation and the market price of the shares.

Since July 2002 the Company has maintain a policy of gradually increasing the dividend, which has been complemented with various share buyback programs.

The dividend for the year 2011 has been paid, as usual, in two tranches: a first payment of 0.77 euros per share last November, and the remaining amount has been paid in two tranches: the first one of 0.53 euros per share in cash(May 18th, 2012) and the second part through a scrip dividend, having shareholders the option of receiving the dividend in cash (or selling their free allotment rights in the Spanish market or selling back to Telefónica at a fixed price of 0.285 euros) or in shares (one for every 38 rights).

In the current extremely challenging economic and financial environment, exogenous factors are creating severe instability and are exacerbating potential financial risks. Since those unprecedented factors are beyond Telefónica’s control, it is crucial that the Company takes definitive steps to effectively defuse potential risks.

The Board of Directors has decided that under the criteria of prudent administration it is in the best interest of all Telefónica’s stakeholders that the dividend and share buyback program corresponding to 2012 be cancelled as a one-time exceptional measure.

The objectives underlying this decision are:

1. To further strengthen the balance sheet through retained earnings, deleveraging and increasing shareholder value.
2. To substantially accelerate debt reduction in the short term.
3. To decouple from exogenous macroeconomic factors affecting our country of domicile.
4. To immunize from debt markets liquidity conditions, by having debt maturities covered till the end of 2013
5. To de-risk the execution of the already announced portfolio management and asset divestment program, to which the Company remains fully committed.
6. To continue investing in profitable growth in our operations.

The shares already acquired will be held as treasury stock and will not be cancelled.

The Company will resume its shareholder remuneration in 2013 by paying a dividend of 0.75 euros per share. The Company intends to pay in two tranches: a first payment in Q4 2013 and a second one in Q2 2014.

In summary, Telefónica has already distributed to its shareholders 2.8 billion euros in cash dividends in 2012 and will continue remunerating its shareholders via dividend payments in 2013.