There was a time when Vodafone was thought of as a growth stock, back when mobiles were the future and the future was bright, or possibly orange.
Now, it seems the very definition of a dowdy utility with a huge pile of debt and the need to splash out huge amounts each year while maintaining a dividend that seems to be the only reason for holding the stock.
The dividend has been maintained at 9 cents – for the last few years the company has been declaring its dividends in euros rather than pence – and is according to broker forecasts not set to increase much in the next three years; the consensus forecast is for a dividend of 9.3 cents in fiscal 2024.
With a yield of around 5.5%, it is dubious whether there is any need to increase the dividend at all and some might argue that with its debt pile, it might be better off cutting it.
Richard Hunter, the head of markets at interactive investor, is not one of those making that argument.
“For the income-seeking investor, a dividend yield of around 5.7% remains punchy and is clearly an affordable and desirable part of Vodafone’s strategy, which should keep it ring-fenced from other drains on capital. The dividend has long been an attraction of the stock and has partially mitigated a tepid share price performance over recent years,” Hunter said in his commentary on Vodafone’s results.
Tepid is not the word I would use for the share price performance. Insipid is closer to the mark, with the shares having fallen from around 233p five years ago to around 133p now. That’s a 43% fall for which a dividend yield of 5.5% is scant consolation.
It would be tempting to call Vodafone a “value trap” were it not for the fact that it trades on a racy earnings multiple of 29.4 times annual earnings.
True, its stock market valuation is apparently only 80% of its net asset value so if the asset valuation is correct, maybe there is some value to be unlocked there although hedge fund Elliott Management tried this argument back in 2018 and made little headway.
Today’s results disappointed the market with earnings coming in shy of forecasts and Russ Mould, the investment director at AJ Bell, has suggested there may be some concern that amid the pressure on earnings the company may struggle to maintain a dividend that it cut significantly in 2019.
Basic earnings per share (EPS) in the year to the end of April 2021 clocked in at 0.38 cents while even the company’s preferred measure of adjusted basis EPS was lower than the divi at 8.08 cents.
The dividend is costing Vodafone about EUR2.4bn a year; fortunately, free cash flow in the year just ended was EUR5.0bn, so it has the cash to cover the payment (for the time being).
Free cash flow (pre spectrum, restructuring and integration costs) in the current fiscal year is expected to be at least EUR5.2bn, but as well as financing the dividend the company has to service its debt, which at EUR40.5bn is almost as large as the company’s GBP39.7bn stock market valuation.
Floating its European telecom masts subsidiary on the Frankfurt Exchange earlier this year raised EUR2.3bn but this, in Mould’s words, took only a “baby-sized” bite out of the debt mountain.
“Since his appointment in 2018 CEO Nick Read has been trying to transform Vodafone from a bloated couch potato of a business into a leaner operator on a fast track to growth; however, every couch to 5k challenge has its setbacks and so it’s proving for Vodafone today,” Mould said.
Given the pandemic put a big dent in roaming revenues in the year just gone, the market might be prepared to give Read a “Mulligan” this time around. Also, three years is not really long enough to turn around a giant tanker such as Vodafone but by the time that stretches to five years, expect the vultures to be circling unless the share price regains further glories.
“At least the longer-term portents are a bit more positive, supported by growth in Germany and a faster rollout of next-generation mobile and fixed networks as well as making market share gains in the broadband market and reducing the level of customer churn,” Mould said.
Interactive investor’s Richard Hunter, meanwhile, concedes there is certainly much to do for Vodafone, particularly in a notoriously competitive sector that can “often simply come down to price in the mind of the consumer”.
“Despite some concerns that Vodafone has become a perennial ‘jam tomorrow’ stock, there is evidence of meaningful progress washing through, and the market consensus of the shares as a strong buy is likely to remain on improving prospects,” Hunter concluded.
Indeed at Deutsche Bank, which has a 230p price target on the shares, Robert Grindle said management’s guidance for between 3-5.5% EBITDA growth on an organic basis for the coming year and then for consistent revenue growth, mid-single-digit EBITDA and free cash flow growth in the medium term “should have been music to the ears of investors waiting for this level of confidence from management for what seems like an awfully long time, and gives physical manifestation to the ‘sunnier uplands’ we have envisioned for Vodafone”.