Vodafone Group PLC (LON:VOD) has cut its dividend in order to provide some financial breathing space for its plans to cut debt and invest in the business, breaking a promise it made to investors as recently as November.
The telecoms colossus, alongside an announcement about the launch of 5G mobile services in seven UK cities in July, said in Tuesday's final results that it was "rebasing" the total dividend almost 40% to 9.00 euro cents per share from the 15.07 cents paid a year ago, meaning it will pay a final dividend of 4.16 cents and from now on will operate a "progressive" dividend policy.
READ: Vodafone institutional investors back dividend cut, see shares bouncing back
It was estimate that this cut will save the company more than £8bn over the next five years.
Speculation in the City had indicated that the board was seriously mulling a cut, but many analysts were adamant that it could and should be avoided.
However, the group reported a sharp swing to a €7.6bn loss for the past year from a €2.8bn profit the year before and chief executive Nick Read said "challenges" from increased competition in Spain and Italy were chipping away at service revenue which, in combination with the high costs of 5G spectrum auctions, "have reduced our financial headroom".
Vodafone's balance sheet, where net debt was trimmed to €27bn from €29.6bn thanks to €2.1bn proceeds from redeeming its Verizon loan notes, has come under increased scrutiny as the company rolls out its new 5G mobile network and completes the €19bn acquisition of central European assets from Liberty Global, which is expected in July.
Revenues fell 6.2% to €43.7bn in the year to 31 March, while an operating loss of €951m was driven by €3.5bn of impairments in Spain, Romania and the new Indian joint venture, partially offset by gains at Vodafone Ziggo and Safaricom. The total group loss also included a €3.4bn loss from the Vodafone India merger.
A key point of transformation
Read said: "The group is at a key point of transformation – deepening customer engagement, accelerating digital transformation, radically simplifying our operations, generating better returns from our infrastructure assets and continuing to optimise our portfolio.
"To support these goals and to rebuild headroom, the board has made the decision to rebase the dividend, helping us to reduce debt and delever to the low end of our target range in the next few years."
For the coming 2020 financial year, he guided for adjusted underlying earnings (EBITDA) of €13.8bn-€14.2bn and flat free cash flow.
The year will also see the continued rollout of 5G mobile, for which the group and its rivals are stumping up many millions for radio frequency spectrum in places around the world. In the UK, Vodafone said it will launch on 3 July in seven cities and lift this total to 19 by the end of 2019, priced the same level as 4G for both consumers and business customers.
Helping the balance sheet, there was also an overnight announcement about an agreement to sell the New Zealand business for an enterprise value of €2.1bn. There have been reports that a sale of the mobile towers business could also be on the cards to free up more cash.
Grasping the nettle
Neil Wilson, chief market analyst at Markets.com, said Vodafone had "bowed to pressure", saying the move from 15 eurocents to 9 "is a very hefty cut indeed".
Eyeing "notable others", maybe alluding to BT Group PLC (LON:BT.A), he said Vodafone "has grasped the nettle and chosen to put the future of the business ahead of short-term returns to yield hungry investors. Now it’s not great news, but at least it shows the new CEO is willing to think longer term and is seeking to manage the debt."
On top of controlling debt, Wilson said one of the key problems was the very large investment needed for 5G rollout.
"Auctions in Italy and elsewhere (Sweden, Australia) indicate the enormous costs and further divestments to shore up the dividend whilst still investing enough in capex seems inevitable. "
Meanwhile, George Salmon at Hargreaves Lansdown said the results were a fair indication of why telecoms is one of the most unloved sectors in the market: "Competition is intense, debts are high and spectrum auctions continue to raise more than expected for European governments, putting pressure on cash flows."
He added that while a dividend cut is "never nice for investors", in the context of the headwinds facing the group and the impending Liberty deal, he thought the decision was sensible. He noted that underlying debt had started to creep up, with the recently issued €3.8bn convertible bond classed as equity, so is not included in debt and will serve to dilute shareholders, and increase the dividend burden given the bonds convert into shares.
"Despite its first dividend cut since 1990, Vodafone still offers a yield of over 6.5%. The prospect of that income, combined with the promise to adhere to a progressive policy from here on, will still turn a few heads.”
Having been higher in early trading, by the afternoon, Vodafone shares had turned 3.5% lower to 127.20p.
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