Competition is fierce in the telecoms market. Many consumers are now price-driven and have little loyalty to a network brand. Ofcom has recently implemented rules to make switching networks even easier, requiring just one text from the customer.
This news doesn’t make life any easier for Vodafone. The company is struggling with high levels of debt and took action in May to cut its dividend by 40%. Under normal circumstances, this would lead investors to be concerned. However, I think it is a sensible approach for a company in this situation, and slashing its dividend will free up money to pay down debt.
When it comes to the dividend cut, Vodafone’s bosses are putting their money where their mouth is. Chief executive Nick Read and finance director Margherita Della Valle have requested that their bonuses be cut to reflect the low valuation of the share price.
A lot is resting on the Vodafone’s $22 billion bid for Liberty Global’s cable networks in Germany and Eastern Europe. Vodafone is aware that customer retention is significantly greater if the consumer has multiple products with the company. If the deal moves forward, Vodafone will be deploying its strategy of cross-selling its products to the existing Liberty Global customer base.
However, there is a fly in the ointment. Currently, this offer is being reviewed by EU antitrust regulators, with the deadline being extended to 23rd July 2019. The price of integrating the businesses would also be vast, with the expectation that costs will be above €1.2 billion. This is far from a risk-free strategy.
Vodafone has also switched on its 5G network in seven UK cities and will be hoping to extend this out towards the end of the year. It is ahead of the curve, launching just behind rival EE. Investors will be waiting to see if consumers are willing to pay more for the speedier network and how Vodafone capitalise on this.
With its share price dropping by over 30% over the past five years, the market has not been kind to Vodafone. The company is also trading at 8.7 times free cash flow. These two points might get some value investors excited. Others believe Vodafone is a share to hold, not buy.
My own concerns are focused on the competition in this field. Part of the value investing strategy involves the company having a moat: an edge that competitors cannot emulate. Vodafone fails in this regard. In the telecoms industry, for customer acquisition to be successful, Vodafone needs to be the cheapest in the market. It’s a race to the bottom and not a good environment for investors.
With question marks surrounding the Liberty Global deal and a large pile of debt, in my view, Vodafone is a value trap and is best avoided.
Neither T Sligo nor The Motley Fool UK have a position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.