Vodafone, as I write, has a market cap of £33bn. But the FTSE 100 company has a net debt position of €44bn (which is approximately £40bn). I can’t justify buying Vodafone shares where the level of debt exceeds the total equity value of the firm.
The management team is implementing a cost-cutting programme and improving its customer focus. These measures will take some time to come to fruition and won’t single-handedly reduce the debt mountain.
Vodafone is also looking to spin off its Vantage Towers business through an initial public offering (IPO) in early 2021. The sale proceeds will be used to pay down debt and possibly pay out a special dividend to investors.
Vantage is Vodafone’s European tower infrastructure business but I have concerns over its IPO. The sale means that the FTSE 100 company will be losing an attractive and valuable asset where revenue is inflation-linked. The requirement for data as well as the roll-out of 5G technology means that growth potential for Vantage Towers is huge.
In 2019, Vodafone completed the purchase of Liberty Global’s assets in Germany and Central Eastern Europe by taking on more debt. The reason behind the deal was to enable cross-selling opportunities in key European markets. Vodafone hopes that this convergence strategy will improve customer retention. While this may be true, it will also take time to bear fruit.
Vodafone’s dividend hasn’t always been covered by its earnings. I’m not convinced that its offering is different to its competitors. Consumers just look for the cheapest deal and other telecom providers could easily copy Vodafone’s strategy. This could impact revenue and thus the security of the dividend. For these reasons I will give the FTSE 100 shares a miss.
Reckitt Benckiser shares have performed well during the coronavirus pandemic. Demand for its hygiene brands, such as Dettol, has been strong, but I don’t think this is sustainable going forward. I’m sceptical over management’s view that the trends established in the current crisis will translate into a long-term behaviour shift.
In September 2019, a new CEO arrived resulting in a change in Reckitt Benckiser’s strategy. The FTSE 100 company will be investing £2bn over three years to improve growth. I agree that a fresh action plan was required to boost Reckitt Benckiser’s sales, but it’s still too early to assess whether the strategy has worked.
My hesitation over Reckitt Benckiser shares has been reinforced by Terry Smith’s complete sale of the stock in November. The company was part of the original Fundsmith Equity portfolio, a £23bn concentrated fund of 30 global stocks.
While Smith doesn’t mention the reason behind his sale of Reckitt Benckiser, I suspect he was concerned that the strong demand for hygiene and health products had peaked and is unlikely to continue.
While Reckitt Benckiser’s dividend yield is attractive, I would like to see some evidence that the new CEO’s rejuvenation programme is working in a post Covid-19 world. I don’t expect the economy to recover fully from the pandemic in 2021. Until then, I will hold fire on these FTSE 100 shares.
Nadia Yaqub 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.