RBC has hit Vodafone Group PLC (LON:VOD) with a double downgrade to ‘Underperform’ from ‘Outperform’, citing an “unsustainable” dividend and “a threat from the 5G spectrum”.
In a note, the Canadian bank said that despite the FTSE 100 mobile operator saying its March 2019 dividend would be unchanged, with a payout costing €4.1bn per year it would be “unsustainable beyond that”, even before a macro slowdown was considered.
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Analysts added that the firm had “little financial headroom despite synergies and cost-cutting” given a number of headwinds including licence fees, competition, a possible new entrant in the German market, and a potential economic slowdown.
RBC also said that it believed the market’s “insouciance over 5G costs materially understates Vodafone's risk”.
“We believe 5G costs could range from €4.5bn to €12.0bn. Our €8bn midpoint would be a negative surprise”.
The bank also believed Vodafone would eventually sell a minority stake in its towers, which it believed to be worth between €7.5bn and €15bn.
“Using a midpoint at 15.5x EBITDA could generate c.€4.3bn in proceeds. Tellingly, the sale of core infrastructure would only reduce leverage by c.0.17x, and would fund just one year's dividend at the current payout”.
Analysts also slashed their target price for the firm to 125p from 260p, saying the company’s leverage is “too high, especially at this point in the economic cycle”.
“Vodafone has been employing many financial techniques to keep consolidated net debt/EBITDA optically low, issuing hybrids and mandatory convertibles and deconsolidating several assets (via strategically sensible M&A). We believe the credit rating policy of a 'robust IG rating' constrains VOD to 'BBB flat' at worst and imposes a 3.5x limit on the business, leaving very little headroom”.
In mid-morning trading Tuesday, Vodafone shares were down 1.3% at 155.3p.