The market’s bullish reaction to Vodafone Group PLC (LSE:VOD)’s €8 billion Italian exit by way of a sale to Swisscom suggests it’s the right course of action, but is it enough to drag the British telecoms giant out of the doldrums in the long term?
Perhaps not, according to AJ Bell’s investment director Russ Mould.
Vodafone’s Italexit (Italeave?) forms part of a massive overhaul of its global strategy of getting rid of loss-making assets and trimming down its humongous pile of debt, but “this deal may not be the full stop Vodafone hopes it will be”, warned Mould.
Vodafone boss Margherita Della Valle made a lot of noise about the board’s decision to return €4 billion of the proceeds to shareholders via buybacks, but this comes at the cost of dividends.
Said Mould: “The decision to cut the dividend in half from next year is interesting, particularly given the announcement of a €4 billion buyback funded from a portion of the proceeds of the Italian and Spanish transactions.
“While this is a one-off payment, a lower dividend over the long term reduces Vodafone’s ongoing financial commitment to shareholders. This may help put capital allocation on a more sustainable footing, but it does dilute one of the key reasons people hold the shares.”
Though Vodafone’s disposal of its Spanish business to Zegona is going as planned, the group’s planned takeover of Three’s UK operations hangs in the balance.
“That merger is being probed by UK competition authorities which have been primed to bear their teeth in recent times,” noted Mould.
“On a 10-year view the shares are down nearly 70% but if you factor in the total return including dividends this adds up to a slightly less depressing (but still sour tasting) 24% loss.
“The rebased payout will ramp up the pressure for Vodafone to deliver consistent growth from its streamlined operations, otherwise the position of CEO Margherita Della Valle will come under greater scrutiny.
“Much will depend on its ability to turn things around in its largest market Germany, with very little for the company to hide behind now if it fails to deliver.”
Vodafone shares were up 5.3% to 69.59p at last count.