Vodafone’s (VOD) decision to slash its dividend in May 2019 didn’t come entirely out of the blue. True, the telecoms giant had never before cut its payouts to investors since first introducing them in 1990. And management still planned to maintain the prior year’s dividend as recently as November 2018.
But the shares had been depressed for some time – ostensibly reflecting concerns that such discretionary expenditure was neither sensible, nor sustainable, at current levels. Other, more pressing, priorities tugged at the group’s purse strings – including the need to pay down a mountainous debt pile and to continue investing in new technologies to remain competitive.
Vodafone opted to “rebase” its dividend from 15.07¢ (13.5p) to 9¢ – knocking the corresponding yield down from an alarm-bell-ringing 10 per cent to a still lofty 6 per cent. This was with a view to reducing debt, and to de-levering towards the lower end of its target range – being two-and-a-half to three times cash profits – over the next few years. No bad thing, one might venture, given that net debt sat at a colossal €27bn at last count. And that’s before the €18.4bn acquisition of cable assets from Liberty Global, which – at the time of writing – the group expected to complete in July 2019.
As outlined in its results for the 12 months to March 2019, Vodafone has also faced competition in Spain and Italy, and challenges in South Africa – weighing on its services revenue. These issues, along with higher spectrum auction costs – pertaining to the process whereby governments provide licences for specific radio frequencies – have restricted its “financial headroom”.
To the latter point, spectrum is expensive. Indeed, we learnt in June that Vodafone has coughed up €1.88bn for next-generation 5G spectrum in Germany – with chief executive Nick Read explaining that it’s important to find a balance between the amount paid for spectrum, and creating an inclusive society via investment in mobile network coverage.
Vodafone aims to build Europe’s largest 5G network – reaching more than 50 cities – by the end of FY2020, after commercial launches in the summer. It switched on 5G services in seven UK cities on 3 July.
It is difficult to predict how much spectrum will cost in each instance, but lowering the dividend should free up the resources needed to buy it. At the time of the preliminary numbers, JP Morgan Cazenove anticipated that spectrum spend would rise considerably in FY2020, before falling in the subsequent year. This would leave the (reduced) dividend uncovered by free cash flows in the current financial year, but covered thereafter.
Vodafone’s asset utilisation plans – including 4G and 5G network-sharing agreements – and its portfolio optimisation strategy could also bring in savings and more cash. So far, on the portfolio front, actions have included the merger of its Indian business with Idea Cellular (albeit engendering a €3.4bn loss on disposal, which contributed to the group’s total post-tax loss) and the sale of its New Zealand business for €2.1bn. It is actively looking at monetising some of its European telephone masts and towers too.
