Should Vodafone ditch its dividend?

The main area of opportunity in the telecoms market is a tricky one to judge. Vodafone (VOD) – although confident of a post-pandemic surge in demand – doesn’t seem sure where the growth will come from. The company plans to invest in its fibre infrastructure network through partnerships, its mobile telecoms towers via the newly spun-out Vantage Towers and digital opportunities including its cloud tie-up with Google. 

And this spending won’t come cheap. In the year to March 2021, capital expenditure increased by €500m (£429m) – not including the €206m spent on 5G mobile network spectrum – and management has plans to accelerate spending further in 2022. Investors baulked at this prospect, which sent free cash flow down 37 per cent to €3.1bn in FY2021 and is likely to stunt free cash flow growth in the current financial year.

Fear of spending might be a hangover from the years of excessive expansion which haunt Vodafone’s debt pile to this day. But the company is now a leaner and more efficient business than it has been for many years. Net debt stood at €40bn at the financial year end, down from €42bn in 2020 and the company has been working to optimise its assets with the aim of improving return on capital employed (ROCE). At 4 per cent, ROCE still has plenty of room for improvement, but it is certainly heading in the right direction after three years hovering around the 3.5 per cent mark. 

But the main puzzle in Vodafone’s streamlining efforts is its continued obsession with paying a dividend. In FY2021, the two 4.5¢ dividend payments cost the company €2.4bn of cash – that’s more than it made from the IPO of its towers network. If the opportunities for expansion are so great at the moment, surely that cash could be better spent somewhere else? 

Vodafone is never going to be an exciting growth company, but its performance in the last decade has been abysmal: revenues are roughly €10bn lower and the share price is just over half its 2011 equivalents. If cutting the dividend completely allows the company to invest in the post-pandemic opportunities that have emerged in telecoms, surely investors would welcome the change in direction. Hold.

Last IC view: Hold, 123p, 24 Dec 2020