Among the exceptions to the gradual return of positive sentiment to the markets so far in November has been telecommunications beast Vodafone (LSE:VOD) — perhaps unsurprising considering just how hated the stock has been over the last 11 months. Priced at 237p near the beginning of 2018, the stock had plummeted almost 40% to languish at 144p when markets closed yesterday afternoon.
All that changed this morning, however, with the stock soaring in value as investors responded positively to the company’s interim numbers.
Cost savings
Group revenue fell 5.5% to €21.8bn in the six months to the end of September with the business also reporting a massive €7.8bn loss from disposing of Vodafone India and asset impairments. On a more positive note, organic service revenue and underlying earnings rose 0.8% and 2.9% respectively, helped by another year of falling operating expenses. The latter was ahead of prior expectations.
Commenting on today’s figures, CEO Nick Read — who wasn’t in the top position for the six-month trading period — stated that the company had taken “decisive commercial and operational actions” in order to tackle increased competition in the key markets of Italy and Spain and that his focus would now be on speeding up digital transformation, getting more from its infrastructure assets and simplifying the operating model. Perhaps most meaningfully for those already invested, Mr Read said that he planned to lower Vodafone’s European net operating expenses by “at least €1.2bn” by 2021.
For the full year, underlying organic EBITDA growth was revised to be around 3%, rather than the 1%-5% previously given. The outlook for free cash flow was also raised slightly (to roughly €5.4bn) with the “strategic and financial benefits” from the acquisition of assets from Liberty Global supporting management’s confidence in the company’s ability to grow this going forward.
Shaky dividends
The capitulation of Vodafone’s share price since the beginning of the year left it trading on 16 times earnings before this morning. So, while clearly a lot cheaper than it used to be, it’s still far from an absolute bargain, even if a PEG ratio of just 1.2 suggests new investors would be getting a fairly good deal for their cash.
Of course, much of the FTSE 100 giant’s popularity rests on its ability to continue returning ample amounts of cash to shareholders. The fact that expectations for the full year have now been revised slightly upwards should give holders some hope that the dividend isn’t likely to be chopped at the current time, especially as today’s interim payout of 4.84 euro cents per share was also identical to that returned in 2017.
That last bit is important. Despite today’s share price boost, the stock still yields a staggering 8.3% in the current financial year — the kind of return that usually precedes a reduction. Given that these payouts are still unlikely to be covered by profits both this year and next, I’m still not convinced that income investors can sleep easy. On top of this, Vodafone’s debts remain alarming. Having increased 6.4% over the reporting period, net debt stood at €32.1bn by the end of September. That’s well over 80% of the company’s market value.
Bottom line? While today’s share price surge will no doubt be welcomed by those already invested, I’m still wary of the stock. For me, there are far better opportunities elsewhere in the market’s top tier.
