When everyone else is cutting their dividends, Vodafone goes against the flow with a small but welcome raise.
The economic downturn has hit Vodafone (LSE: VOD) just like the rest of its competition, including BT Group (LE: BT-A), as reported last week. As consumers tighten their belts and reduce their discretionary spending, new 3G phone contracts, expensive mobile web surfing, and spending all day texting, are the kinds of things that people can easily cut back on.
To that end, in full-year results released this morning, Vodafone has announced plans to cut costs more aggressively than previously anticipated, and is now aiming to save around £650m by March 2010, up from its earlier £500m target. Longer term the company is aiming at £1bn in cost reductions, which is in line with the cuts that BT is trying to achieve. That's a demanding target, and whether Vodafone will be able to meet it without turning to redundancies, as BT is doing, remains to be seen.
Show us the cash?
After taking a painful £5.9b write-down against a poor performance in Spain, Vodafone recorded pre-tax profits of £4.2b, which is less than half of last year's £9.2b.
That came from revenues that were up 15% to £41b in sterling terms, but that was almost entirely due to changes in currency exchange rates, with the strength of the euro playing a significant role. Adjusted for currency fluctuations, underlying revenue growth came in at a pretty flat 1.3%.
That all-important measure in tough economic times, free cash flow, remains strong at £5.7b, even if that is a bit flat -- it's a rise of just 2.5% in sterling terms, and probably a small fall once exchange rates are taken into account.
In the words of Chief Executive Vittorio Colao, describing his first full-year results since he took charge:
"These results demonstrate the impact of the early actions we took to address the current economic conditions and highlight the benefits of our geographic diversity. The business continues to generate cash strongly and we have made good progress in implementing the strategy announced in November. Data revenue grew to £3 billion for the year and our broadband and enterprise businesses continue to perform well. Our £1 billion cost reduction programme is ahead of plan and we continue to explore further ways to reduce cost. We maintain our tight focus on capital discipline and returns to shareholders"
Dividends
That tight focus on returns to shareholders appears to be holding up, as the company went against the tide of some of the dividend-investors' favourites -- including BT last week and Marks & Spencer (LSE: MKS) today -- who are slashing dividends.
Vodafone's final dividend is pencilled in at 5.2p, providing a full year dividend of 7.77p, which is up 3.5% from last year. Against the share price at the time of writing of 127p, that's a dividend yield of 6%, and to maintain that in such times is good going.
The future
The company declined to make any revenue predictions for 2009-10, but did tell us that it is unlikely to beat this year's adjusted operating profit of £11.8b. Free cash flow forecasts suggest something in the £6b to £6.5b range, which would be nicely ahead of this year's figure.
Growth in European markets is going to be hard to achieve, as those markets reach maturity. There will be plenty of technological change happening in coming years, but there are few people left who do not have some sort of mobile communications device, and most people are pretty much at the limits of what they want to spend every month.
Spain is a particularly volatile market, as it has a greater proportion of "Pay as you go" subscribers who can more easily cut their spending. Should the recession continue much longer, we might start seeing people in other countries ditching their existing contracts in order to save cash.
To counter this long term European slowdown, Vodafone is continuing with its policy of targeting emerging markets, and told us that results from Africa and India were strong.
If the company can continue to weather the economic storm, successfully pursue growth in emerging markets, and keep the cash flow going, I think that 6% might be one of the more reliable dividend yields to be had these days.
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