It seems clear that the stock market has been reappraising the prospects for telecoms operator Vodafone (LSE: VOD) recently and the shares are up almost 30% over the past two months or so.
I last wrote about the company in May not long after it had cut its dividend. The debts were high, cash inflow had been flat for years, and the share price had been falling for around 17 months, wiping off more than 40%. I argued back then that there’s nothing in the financial record to suggest that Vodafone was gaining ground with its earnings, so I was avoiding the shares.
Monetising its assets
But Vodafone has out-foxed me since! On 26 July the firm announced plans to unlock value for shareholders by creating “Europe’s largest” tower company. The idea is that 61,700 of the company’s towers will be separated into a new organisation planned to be operational by May 2020, with its own management team.
Vodafone is looking at ways to monetise the assets, which could include an IPO of the new tower company. It seems like a smart move. Cashing in the inherent value of its own assets will help the firm reduce its big debt load later on.
And the market likes it. The shares shot up about 15% when the announcement hit the newswires and the price has been drifting up ever since. But City analysts following the firm are still only predicting flat revenue, cash flow and dividends ahead, which I find it difficult to become excited about.
Upgrading the network
Right now, Vodafone is busy rolling out its 5G network. But where will it end, 6G, 7G… 27G? One of the big challenges in the business, as I see it, is that technology keeps evolving and so does the need for Vodafone to reinvest. But does the reinvestment score the firm much competitive advantage, or is it just a cost involved to keep up?
Vodafone used to be a fast-growing player in an exciting, up-and-coming sector, but now I see it as a commodity-style provider of services that will probably never shoot the lights out with growth again. Indeed, I suspect most investors coming to Vodafone today will be attracted by its dividend yield, which is running just above 5% with the shares at 163p.
But I want my dividend-paying investments to be supported by generally rising revenues, earnings, cash flows and share prices. Right now, most of those things remain flat with Vodafone, which unsurprisingly leads to a flat dividend.
Maybe we’ll see the new infrastructure deal regarding the towers help things along for a while. But let’s not forget that the share price has recently plunged and the dividend has been cut. I’d feel nervous holding the shares for, say, the next 10 years, so I’ll continue to avoid them now.
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Kevin Godbold has no position in any share 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.