For months it seemed as if shares in telecommunications giant Vodafone (LSE:VOD) were on a downward spiral that could not be tamed.
Then came Friday’s trading update, which included the unexpected announcement that it would be establishing a standalone business for its 62,000-strong tower network, and that the company plans to float the entity within 18 months if all goes to plan.
That news sent the shares flying up 15% on Friday, but Vodafone still has a long way to go to recoup much of the value it has lost in recent years. The stock is down more than 30% in the last two years on the back of increased competition in key markets as consumers jump ship on a regular basis to find the best deals.
Alarm signals
Levels of debt within the company have also been setting alarm signals off for many investors. Vodafone’s debt levels are around £28bn following the acquisition of Liberty Global’s German and Eastern European networks. The European Commission approved that deal last week, following a review of whether it breached the bloc’s antitrust legislation.
While that level of debt may be alarming, what I see as most significant is the fact that CEO Nick Read has slashed the dividend to 9 cents from 15 cents per share.
That may not sound like positive news on the face of it, but in many senses it was a sound move on the part of the board in order to tackle the rising debt levels.
As was pointed out by Read during the company’s trading update, the dividend yield currently sits at around 5.2% based on its current price of 150p — higher than the FTSE 100 average of 5%.
It’s great when companies can provide consistent and incremental dividends to shareholders, but knowing when the time is right to cut payouts is important as well.
Quarterly results
The quarterly results announced in the trading update came in ahead of expectations — Q1 group revenue fell by 2.3% to €10.7bn while it reiterated its EBITDA full-year guidance of between €13.8bn and €14.2bn.
Much will depend on the success or otherwise of its new tower network venture, to be known as Towerco.
The new business will mostly focus on Vodafone’s key markets of the UK, Germany, Italy and Spain and has the potential to unlock around €900m in adjusted earnings per year.
With additional cost-cutting in place following the shedding of its underperforming New Zealand operations, as well as the announcement of a new tie-up with O2 to bring 5G to UK customers, I see plenty of potential improvements to the business which should make it a more attractive prospect for investors.
Trading on a current price-earnings (P/E) ratio of 31, many will see it as an expensive investment, but I’d still buy the dip in Vodafone shares at this point based on the growth strategy the company is pursuing.
