Results from Vodafone PLC (LON:VOD) got a positive report card from City analysts for its annual results, with maintenance of the dividend a highlight after 43 of the FTSE 100 have so far cut, suspended, deferred or cancelled their payouts amid the coronavirus outbreak.
The telecoms group’s full-year numbers were “reassuring on a number of fronts”, analysts at UBS said, with many more positives than negatives.
One of the key upbeat notes was that organic service revenues of 1.6% in the fourth quarter were notably ahead of the consensus forecast of 0.9%, with the improvement driven by notably lower declines in Spain and Italy.
With a massive EUR42.2bn debt mountain to chip away at, other highlights picked out by the Swiss bank’s number crunchers were that the planned ‘monetisation’ of the European Towers arm via an IPO early next year “should lead to a step-down in leverage”; while there was also heart taken from the new announcement of a EUR1bn of run-rate savings to be made in the coming three years, up from EUR400mln that had previously been factored in.
Dividend in focus
While the outlook remains somewhat clouded by coronavirus, UBS hailed the maintenance of the 9 eurocents dividend, “well covered” by free cash flow and said, “we think there are enough positives for VOD to reverse its recent underperformance vs the sector.”
Richard Hunter, head of markets at Interactive Investor, said that the “prodigious cash generator” maintaining its dividend “will be a pleasant relief to increasingly starved income-seekers”.
“The projected yield of over 7%, even if partly driven by a weaker share price, is nonetheless particularly attractive given not only the current interest rate environment but also the relative lack of income options elsewhere,” he said.
Comparing to FTSE telecoms peer BT, which cut its dividend last week to preserve cash for investment, was odious, felt William Ryder at Hargreaves Lansdown, as the structures of the two groups differ so much, “but Vodafone shareholders will still be glad their management team feels secure enough to keep paying through the pandemic and transition to 5G”.
Indeed, it is “a far cry from last May”, said Russ Mould, investment director at AJ Bell, recalling when Vodafone’s new chief executive Nick Read sanctioned the first dividend cut in the company’s history.
“Vodafone’s ability to hold the (reduced) dividend rests upon its cash flow, where there was a marked improvement in performance in the year to March 2020,” Mould said, noting that free cash flow jumped strongly as the company optimised its portfolio of assets, cut costs and benefited from ever-growing data and video consumption by consumers via their mobile devices.
He noted that the telco is the Footsie’s ninth biggest payer in cash dividend terms, based on their last full-year payment.
Spinning many plates
Looking at the telecoms group’s operations, Hunter and Ryder both noted how the multinational nature of the business, especially with the European operations bought from Liberty Global for EUR18.4bn last summer, means Vodafone is spinning many plates.
“But there are signs that the overall picture is improving after some difficult times,” said Hunter, picking out the improvement in revenues and a return to underlying profits from a previous loss of EUR2.6bn, noting that the increasingly important German business was reaping the rewards of retail growth, offering cost synergies and a “potentially rich seam of cross-selling opportunities”, including from the company’s 5G roll-out reaching 97 cities across eight European markets.
With the Covid-19 pandemic has been “something of a curate’s egg” for the telecoms group, Hunter added, with international roaming falling 65-75% but being slightly offset by higher data usage and lower customer churn.
Ryder noted the biggest wobble among Vodafone’s spinning plates was probably the adverse judgement from India’s Supreme Court, which cost shareholders EUR2.5bn, though he felt that this was relatively small cheese among the whole group, especially as the core business segments were “doing reasonably well, and the group put in a good performance in almost all major markets”.
All in all, Hunter felt Vodafone has “defied the odds during a difficult year” and although he felt there is “some considerable way to go in assuaging investors who have seen the shares plummet 46% over the last two years”, he said the market consensus of the shares as a strong buy has not wavered.
Indeed, UBS kept its ‘buy’ rating and 190p price target.
Mould was more circumspect, eyeing Shell as an example for how “asset disposals and capex optimisation can only take you so far when it comes to paying a dividend and it still feels as if Vodafone is having to work hard to generate sufficient cash to keep the dividend truly comfortable.
“The UK’s 5G auction, whenever it happens, could be the next key test,” he said.
“Growth prospects for the [dividend] feel limited as a result and history shows that over the long term it is those companies which prove capable of consistently providing dividend increases that provide the best share price performance and total returns, rather than those that have to fight hard to defend an already fat pay-out.
“Vodafone’s unchanged dividend is a clear source of relief for investors today but whether it translates into a sustained rally in the shares from 12-year lows remains to be seen.”