What should Vodafone shareholders do next? The stock is languishing at nine-year lows, with the disappointing performance prompting some investors to wonder if it’s time to get out.
Yet the telecoms group is also at a major crossroads which could dramatically revive its fortunes – or cause more trouble.
Analysts say Vodafone’s £16billion takeover of Liberty Global’s European cable assets, which it hopes to have approved this year, could bag it significant cost savings across the business.
Dividend fears: Vodafone stock is languishing at nine-year lows, with the disappointing performance prompting some investors to wonder if it’s time to get out
And the group is also poised to roll out cutting-edge 5G mobile networks across Europe, which are expected to allow a dizzying array of new devices – including autonomous cars and even talking fridges – to connect to the ‘internet of things’.
Vodafone is pondering the future of its masts business and whether it will sell a stake in it, another possible source of income.
But at the same time, boss Nick Read – who took over in October – must wrangle with a £26billion debt pile and keep investors onside.
Many remain worried about the firm’s £3.5billion dividend, despite reassurances from management.
Vodafone first handed shareholders a dividend in 1990 and has never cut it since.
Last November the company said this year’s payout to shareholders would be flat and most analysts are not expecting a surprise cut this year.
However, they are divided on whether Vodafone will be able to maintain this in the long run.
Russ Mould, investment director at AJ Bell, warned the company was ‘facing many challenges on many fronts’. Investors must be careful, he said, because the company is juggling growing spending with pressure on its profits – something that affects how much free cash it has for the dividend.
Chief amongst analyst concerns are the costs Vodafone could face to roll out 5G mobile services.
The technology, following 3G and 4G, will give customers even speedier connections to browse the internet and stream content such as music and video straight to their phones.
It will also allow a litany of other technologies to be developed, which were previously not possible at slower speeds.
But Vodafone must first acquire air waves – known as ‘spectrum’ by industry wonks – in various countries which it can use to run its 5G network on.
A £1.4billion auction of these air waves has already taken place in the UK, but telecoms firms were left feeling burnt by one in Italy that squeezed £5.6billion out of them. Vodafone individually paid around £2billion for its share, far more than it had originally planned.
Chief executive Read was frustrated enough that he warned European governments not to use the auctions as cash cows.
But all eyes have turned to an upcoming auction in Germany. And analysts say a higher-than-expected payment could dent the cash pile needed for the dividend.
On top of this, it is facing tougher competition in the key markets of the UK, Spain and Italy. According to Reuters, analysts expect it to post a slight drop in full-year sales to £38.5billion in May.
Vodafone’s bosses have repeatedly insisted they have cover for the dividend, pointing to planned cost savings of £1billion over three years and partnerships with rivals that should reduce how much the firm has to spend on infrastructure.
The company’s takeover of Liberty Global cable assets is also expected to yield more cost savings, boosting cash flow.
After the deal, Vodafone will also be the continent’s biggest provider of broadband, cable and mobile services – giving it a presence in European living rooms comparable to Sky.
Dhananjay Mirchandani, an analyst at Bernstein, believes that Vodafone is a stock that will substantially outperform its peers. But he admits cover for the dividend ‘will be tight’.
In a note, he said: ‘The big unknown will be the cash spend in the German spectrum auction: movements up or down from our forecast would have significant implications for the dividend.’
But he added: ‘We remain convinced that Vodafone does not need to cut its dividend and will not do so.’
Mould also believes an imminent cut – short of some unforeseen calamity – is unlikely.
But he says: ‘This may yet be one meaty-looking FTSE 100 dividend yield that proves to be ‘too good to be true’ over time.’
Popular Shares: Aviva
Insurance has never exactly got pulses racing as a business, but Aviva’s making a bit of an art form out of being dull.
Its competitors are showing signs of significant change, with Prudential growing in Asia, Legal & General leading the market in passive funds and pension de-risking, and Standard Life Aberdeen reinventing itself as an asset manager.
Not all of this rousing activity has been successful though, and that’s left Aviva somewhere in the middle of the pack in terms of share price performance in recent years.
Hopes had been growing that the new chief executive Maurice Tulloch might have some radical plans for the future.
Instead he’s pledged to re-energise Aviva with a focus on insurance fundamentals, customer service, and reducing complexity. Laudable goals for sure, but not a significant departure from the previous strategy.
Aviva is a leaner beast than it was, and that’s helped it generate high levels of capital, which can be used to reduce debt and pay dividends.
It is trying out some new things, like a direct investment business and building a digital solution which will tie its products together.
All solid stuff, but nothing to get too excited about. A dividend yield of 7.7 per cent is attractive, and that remains the main incentive to hold the shares.