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Why the Vodafone share price rose 4% in August

On the surface, telecommunications giant Vodafone Group (LSE:VOD) has had a fairly dull year to date, during which the share price has trundled along, dipping and climbing. It began 2019 at £1.52 and came back to that in August.

The share price started August at £1.49 and ended at £1.55. It had a low point of £1.46 early in the month, but overall gained upward momentum. This 4% rise is encouraging, given that the share price fell over 11% during August 2018.

Porsche Formula E

Its price rose most significantly on August 29, after Vodafone announced it will sponsor Porsche when it enters the 2019/20 ABB FIA Formula E Championship in a five-year sponsorship deal.

Formula E is a heavily-watched race for electric cars. It’s the first International, fully electric, single-seater racing series at speeds of over 200 km/h, with zero emissions. It takes place on the streets of 12 major cities across four continents. The series was conceived in 2011 and Porsche will make its debut in November.

I think sponsoring it is a good marketing play by Vodafone, which will see its branding on the first all-electric racing cars in Porsche’s history, and the drivers’ uniforms. It will also provide communications equipment and technical support.

However, I’m not really convinced that being flash with its cash in this way is enough to kick-start a steady rise in this share price.

Fellow Fool Rupert Hargreaves recently pointed out 3 reasons why the Vodafone share price could continue crashing and they give pause for thought.

The company is debt-laden and although it has a healthy dividend yield at 5.5%, this is the result of a cut from 9.4% in May. It is still not fully covered by earnings per share, so may be at risk of further slashes. It is also trading on a high forward P/E ratio of 20.

In its most recent trading update for the quarter ended 30 June, the company claims customer satisfaction and data usage has significantly increased thanks to its simplified pricing structure and worry-free data usage. The plan is to reduce operating costs in Europe and common functions of at least €1.2bn by FY21, based on €400m per year including FY19 and FY20. This positive sentiment is exactly what shareholders want to hear — happy customers are vital to the success of a mobile phone company. Nonetheless, achieving savings this big will be no mean feat.

Vodafone towers

The trading update also talked about the legal separation of its European tower infrastructure into a new organisation (TowerCo), which will be monetised and managed by a dedicated management team. Positive sentiment about this could be what really drove the August share price rise after a sharp spike in late July. TowerCo is expected to be operational by May 2020, but the monetisation method has not yet been decided.

The trading update stated that it could be an IPO or disposal of a minority stake, alternatively, management is considering the disposal of minority or majority stakes at an individual country level. There are 61,700 towers, so there is the potential for serious money to be made, but until the direction is confirmed and figures are quoted, it’s anyone’s guess as to how profitable TowerCo will be or if it will be a part of the current company.

I think the 4% rise in August’s price is positive, but it remains to be seen if this momentum will continue.

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Kirsteen has no position in any of the shares mentioned. The Motley Fool UK has no 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.