Vodafone shares yield greater than 6% – must you purchase, or steer clear?

A latest submit on the FT Alphaville weblog describes Vodafone (LSE: VOD) as being one of many UK’s most “persistently irritating” firms. It’s arduous to argue with that assertion.  

The group has flip-flopped from technique to technique over the previous 20 years, and shareholders have been left holding the bag. Over the previous 15 years, the Vodafone share worth has produced a complete return of 94% in comparison with 114% for the FTSE All-Share Index.  

Which may not appear too unhealthy on the face of it, however if you happen to exclude dividends, the shares have returned -59%.  

This efficiency displays the truth that Vodafone’s shareholder fairness has slumped from €92bn to €57bn over the previous ten years as the corporate has struggled to develop in a aggressive setting.  

Vodfone’s challenges are twofold.  

Telecoms firms require huge quantities of capital to develop and keep their property. For instance, over the previous 11 years Vodafone has spent just below €9bn (£7.6bn) a yr on new tools and know-how. To place that into perspective, a enterprise with a market capitalisation of £7.6bn could be the Forty eighth-largest firm within the FTSE 100.  

And Vodafone can’t meaningfully minimize this spending as it would lose market share. That is the opposite nice problem the agency has to handle, and it is likely one of the explanation why CEO Nick Reed has been calling for higher consolidation within the European market.  

Vodafone has been attempting to consolidate the market to enhance returns  

To provide the corporate credit score, it has been attempting to consolidate the market. In 2019, Vodafone accomplished the €19bn buy of Liberty World property in Europe, increasing its footprint in Czechia, Germany, Hungary and Romania.  

Underneath stress from Cevian Capital, Europe’s largest activist investor, Vodafone has additionally tried to ink offers in Spain and Italy, and is rumoured to be a cope with Three within the UK.  

Three UK is owned by Hong Kong infrastructure conglomerate CK Hutchison and is the UK’s fourth-largest cellular operator. Any deal is prone to include substantial synergies, however it’s additionally prone to appeal to important scrutiny from regulators. What’s extra, contemplating Vodafone’s latest file, there isn’t a assure it should occur.  

Regardless of these headwinds, Vodafone’s outcomes for the yr to the top of March present it’s making progress rising revenues and income. Revenues rose 4% to €45.6bn and working revenue elevated by 11.1% to €5.7bn. In Germany (a market analysts hold a detailed eye on because it accounts for 30% of Vodafone’s service income) income grew by 1.1%.  

That stated, whereas any development is optimistic, within the face of high-single-digit inflation, the numbers usually are not all that spectacular.  

I feel Vodafone’s money stream figures are a way more correct reflection of the corporate’s monetary place. Free money stream for the yr totalled €3.3bn, all of which was swallowed up by dividends (€2.5bn) and share buybacks to offset “dilution linked to necessary convertible bonds.” With additional cash flowing out than coming in, group internet debt elevated by €1.1bn to €41.6bn. 

In different phrases, Vodfone is paying out greater than it may well afford. And never for the primary time: within the 2021 monetary yr it paid out €2.4bn to shareholders on free money stream of €3.1bn, and spent €1.5bn shopping for out remaining minority shareholders in Kabel Deutschland Holding to resolve a long-running authorized dispute.  

The agency was in a position to scale back total debt by packing up a few of its infrastructure property into a brand new enterprise, Vantage Towers, which unlocked €2bn in an IPO.  

The Vodafone share worth appears to be like engaging however buyers ought to steer clear 

Regardless of Vodafone’s international footprint, big capital spending, income development and acquisitions, the enterprise remains to be counting on asset gross sales to maintain debt beneath management and fund dividends.  

That is solely sustainable for therefore lengthy. And administration is now warning that life goes to get tougher for the enterprise because the “macroeconomic local weather presents particular challenges”. Vodafone will have the ability to elevate costs in keeping with inflation for subscribers on a few of its contracts, however this might enhance churn if customers begin to store round.  

Whereas the Vodafone share worth at present helps one of many highest dividend yields within the FTSE 100, buyers have to look previous the inventory’s 6.4% dividend yield and deal with its long-term file of making worth.  

On this entrance, Vodafone’s file is horrible. It has been promoting the household silver to fund shareholder returns whereas borrowing cash to fill any gaps. Internet debt stood at €24.4bn on the finish of 2012. On the finish of March the determine was €41.6bn. With rates of interest on the rise, the price of this borrowing is barely going to develop.  

It doesn’t seem as if Vodafone’s prospects are going to enhance any time quickly. Buyers could also be higher off trying elsewhere for earnings. 

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