On Monday, Vodafone (LSE:VOD) announced that chief executive Nick Read will leave the company at the end of the month.
News of his abrupt departure came less than three weeks after the group published its half-year results.
Vodafone’s share price has been on the slide for most of the year. And, as the price has fallen, the dividend yield has correspondingly risen. It’s 8.4%, as I’m writing.
Has Vodafone become a compelling value stock or is it one to avoid with a bargepole?
Underperformance
Vodafone’s shares are down around 20% this year, but have performed disappointingly for considerably longer.
They’ve lost over 40% of their value since the start of Read’s four-year tenure as CEO. This is a huge underperformance against both the FTSE 100, which is up 3%, and sector peers of the European STOXX telecom index (down a relatively modest 15%).
Underwhelming
The company’s financial performance has also been underwhelming.
In the year prior to Read taking the helm, the group generated revenue of €46.6bn, adjusted earnings per share of 11.59c and paid a 15.07c dividend. For the latest year, the respective numbers were €45.6bn, 11.03c and 9c.
Net debt over the period ballooned from €31.5bn to €41.6bn. And the recent half-year results showed a further rise to €45.5bn.
Messed-up M&A
The rise in debt reflects Read’s attempts to ignite growth through consolidation in Vodafone’s major markets with merger and acquisition (M&A) activity.
The acquisition of Liberty Global’s Germany division, and further activity in what is Europe’s largest market, isn’t currently looking like it’s paid off. A possible merger with MasMovil in Spain came to naught, with France’s Orange doing a deal and stealing a march on Vodafone in consolidating the Spanish market.
Read has also overseen the sale of Vodafone’s Hungarian business, the rejection of an offer for its Italian business, and the spin-off and partial sale of its Vantage Towers infrastructure arm. Meanwhile, a mooted deal to merge its UK business with rival Three UK has yet to materialise.
What does all this amount to? According to a recent analysis by Bloomberg columnist Chris Hughes: “Vodafone is an MBA case study of messed-up M&A.”
Activists
Hughes is on the same page as activist shareholders, who have been on Vodafone’s back for some time. We’ve heard criticism about boardroom personnel, the growth strategy, the complex and sprawling empire, and the declining share price.
The market’s response to the recent results — the share price dropped 8% on the day — appears to have spurred the board into taking some action.
Guidance downgrade
The results showed a deterioration in Vodafone’s major European markets. The performance in the biggest — Germany (around 30% of group revenue) — was particularly disappointing. The business lost customers and profits fell.
On the back of the weak first-half performance, Vodafone downgraded its guidance for the group’s full-year outlook. It brought down the top end of its adjusted earnings range of €15bn-€15.5bn to €15.2bn, and cut its adjusted free cash flow guidance from €5.3bn to €5.1bn.
In the face of high energy costs and rising inflation, management warned of price hikes and job losses, saying it’s targeting cost savings of €1bn+.
Where next?
In announcing that “Nick Read has agreed with the board that he will step down,” Vodafone signalled no change of business plan. Interim replacement, group chief financial officer Margherita Della Valle, has been tasked with simply “accelerat[ing] the execution of the company’s strategy.”
Della Valle is likely to be seen as a continuity candidate for the permanent position by investors who want anything other than more of the same. However, the company is also considering external candidates.
Some analysts have asked what any new CEO — internal or external — could really do differently. I think activist investors would say that a radical overhaul or break-up of the group would unlock value for investors.
Aviva CEO Amanda Blanc achieved such a result with admirable speed and aplomb following her appointment in July 2020.
In the balance
Is Vodafone a compelling value stock or one to avoid with a bargepole? It’s not an easy question to answer, but I do think the 8.4% dividend yield may not be a reliable indicator of value.
The company’s debt level is uncomfortable, despite the Vantage Towers transaction, and with the current weak business performance and announcement of the CEO’s departure, I agree with analysts at Jefferies, who commented: “We think dividend policy should be treated as under review.”
