Vodafone: Competitive times ahead are calling
VODAFONE has a commanding position as one of the largest telecom companies in Europe.
Despite being a well-known brand here, the UK only contributed 14 per cent of revenue last quarter. Vodafone’s biggest market is Germany, with 30 per cent of revenue. The group also has large positions in Italy, Spain and Africa.
The internet has become essential for most of us during the pandemic. This means the core demand for Vodafone’s services has remained relatively stable.
The more significant impact has been the reduction of roaming revenue, as fewer of us have used phones abroad. However, this should recover, so investors should focus on the bigger picture. Vodafone, and telecoms generally, have exciting opportunities ahead with the rollout of 5G. However, competition remains intense, capital expenditure eye-watering, and companies have to shell out a lot of money to use the electromagnetic spectrum for mobile data. All this puts pressure on cash flows.
Vodafone’s debt pile had reached €44bn (£38.6bn) in its half-year results, thanks primarily to an acquisition in Europe. The planned sale of some European tower assets will help reduce the burden. The group is targeting 2.5-3.0x net debt to cash profits, which feels reasonably comfortable.
Against that, the positive case for Vodafone has long been based on an attractive dividend. After a recent cut the rebased dividend is well covered and looks like it should be sustainable. The question now is whether the sharper consumer focus can help the group grow shareholder returns.
Speed-tiered unlimited data plans is one of the latest attempts to offer something different. It is showing early signs of success, but ultimately there isn’t much preventing competitors from copying it. And that’s the industry’s biggest challenge. There’s not much differentiating mobile providers other than price. Although Vodafone’s strategy makes some sense, price competition and massive cash requirements are here to stay.
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