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The Risks Of Investing In Vodafone Group Plc

Today I am highlighting what you need to know before investing in Vodafone (LSE: VOD) (NASDAQ: VOD.US).

European travails roll on

The effect of continued sales weakness in the continent continues to pummel Vodafone’s bottom line. The telecoms giant saw group service revenues slump 4.3% in the 12 months concluding March 2014, to £39.5bn, as turnover on the continent nosedived an eye-watering 9.1%. Europe is responsible for more than two-thirds of total revenues, and although the firm is boosting its exposure to emerging geographies to offset problems here, enduring weakness in Europe clearly remains a huge concern.

Indeed, the prospect of worsening continental problems is expected to result in a colossal 61% earnings decline for the current year, worsening from the 16% drop posted in 2014. With competition increasing on the continent, and wider macro pressure on consumers’ wallets enduring, Vodafone could struggle to gain sufficient traction to turn around its ailing fortunes.

Regulatory reforms loom large

On top of this, Vodafone is also fighting a battle against proposed European Union legislative changes that threaten to put a further boot vodinto its earnings profile.

This month, new laws came into effect that capped what network providers can charge for customers making calls, sending text messages and surfing the internet when travelling in Europe. And EU legislators voted last month to put all roaming charges to the sword, although these plans still need to be signed off by the bloc’s governments.

A fragile dividend selection

On top of its murky near-term earnings outlook, Vodafone’s dividend prospects for this year and next can also be described as extremely fragile at best. Indeed, City expectations for growth to tank in 2015, to 6.8p per share, means that a predicted dividend of 11.4p are not even covered by earnings. And the situation is not much better the year after — a payout of 11.8p per share far outstrips a slight earnings recovery to 7.2p.

These projections create massive yields of 5.8% and 6% for 2014 and 2015 respectively. But in my opinion a backdrop of consistent earnings pressure, not to mention the effect of its vast Project Spring investment programme and rolling acquisitions drive on cash reserves, could put dividend growth under the cosh.

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> Royston does not own shares in Vodafone.