Vodafone (VOD) and BT (BT.) have disappointed investors for years with a lack of growth, but healthy cash generation meant they could at least pay out healthy dividends. Share prices weren’t moving anywhere in a hurry, but investors would get a yield hovering around 6 per cent every year. It was an acceptable deal. The problem for investors is that inflation has put this equation under threat.
Both BT and Vodafone invested heavily to upgrade their infrastructure. This means laying fibre-optic cables and buying up 5G spectrum. These plans are expensive and take a long time, and when they were envisioned inflation was around 1 per cent and both companies had plenty of cash to invest. Then came last year, when UK inflation rose above 10 per cent, pushed up by the price of energy and other factors.
In its half-year results in November, Vodafone reported that adjusted cash profit before leases (Ebitda) slipped 2.7 per cent to €7.2bn (£6.4bn). Meanwhile, licence and spectrum fees jumped over eight times to more than €2bn. This all contributed to free cash outflow rising from €1bn to €3.2bn. The company lowered its full-year adjusted free cash flow guidance from €5.3bn to €5.1bn.