The Vodafone (LSE: VOD) share price picked up 4% Monday morning. It caught my eye, as I’ve often been tempted to buy Vodafone for dividend income. It did need to cut its overstretched payments by 40% in 2019. But we’re still looking at yields of around 6.4%.
I’ve kept away because I’ve felt the company needed a shake-up, not least in the cash department. A major investor has just taken a £3.3bn stake in the global telecoms giant. So could we be a step closer to that now?
The UAE-based buyer, previously known as Etisalat but recently rebranded as e&, has bought up 9.8% of Vodafone, to become its largest shareholder.
The state-controlled UAE group said its move is a long-term one. It says it’s part of its “ambition to be a global player in telecom and technology and to increase its exposure to international markets.“
No activism here
It appears e& (apparently pronounced eand judging by the group’s internet domain) supports the current board and its strategy. The new buyer does not seek a board position, adding that “e& has no intention to make an offer for Vodafone.”
Private investors like me however, might be a little disappointed by the chances of any refocus coming. I wonder if the Vodafone share price might have climbed further had the new approach come from an activist investor.
Still, the announcement did also speak of “possible commercial partnerships in the areas of R&D, technological applications and procurement“. So maybe there could be some strategic developments there.
Changing circumstances
This new development leads me to re-examine Vodafone. That’s a key part of my long-term investing strategy. If anything material happens to a company I own, or might buy, it’s time to check things out again.
But if the event is just a share price fall and I see no underlying deterioration in the company itself? Then I’ll pay little attention and keep on holding. Or maybe even buy more.
What really keeps me away from Vodafone is its combination of debt and dividends. It doesn’t make sense to me to pay 6%+ dividends and engage in share buyback programmes while shouldering more than €40bn in debt.
Still, e& does reckon there’s “a compelling and attractive valuation” in Vodafone. It also says it sees “a clear opportunity to realise future value through potential capital gains and dividends“.
Should I buy now?
Should this confidence shown by e& change anything for me? There is one way for Vodafone to settle my concerns and make its approach to cash more attractive. That’s to grow future earnings enough to provide strong cover for the dividend and reduce debt.
On balance, I don’t think much has changed at all just now. But it might do in the future. And the debt-funded growth strategy has worked well for plenty of companies in the past.
Will I buy Vodafone shares? I’m going to stick with ‘maybe some day, but not just now’.
