Vodafone keeps punchy dividend, but wider sector struggles

Market consensus is a strong ‘buy’ for the phone behemoth as investors buy into recovery potential.

Vodafone (LSE:VOD) continues to grind out progress and has swung to a profit for the first half of 2020, compared to a previous loss.

Most notably, the huge and complex transformation is coming together.

Outright business sales in non-core areas such as New Zealand and mergers in other areas such as Australia and India deliberately leave the group to focus on mobile data and payments in Africa. The main focus is converged connectivity in Europe.

Europe now accounts for 77% of overall revenue, within which the purchase of Liberty Global’s German assets has resulted in Germany providing more than 40% of group adjusted earnings.

The converged pack of fixed-line and mobile connectivity extends to related products such as the Internet of Things and TV, and is now available in all of the group’s major markets. 

To date, the roll-out of 5G in 127 cities provides further growth potential, while the new focus of the business is also enabling further collaboration across the company. 

Operating expenses declined by €300 million (£269.6 million) in Europe over the period, while the planned savings of €535 million following the Liberty Global deal are ahead of schedule.

Meanwhile, the initial public offering (IPO) of Vantage Towers remains on track. The realisation of value will be of benefit to shareholders, but, more importantly, will give Vodafone the opportunity to pay down some of its bloated net debt position. 

• The Week Ahead: Vodafone, easyJet, Kingfisher
• Vodafone’s prospects and 7% dividend yield remain undervalued
• Vodafone shares: 8% dividend yield and potential to double

The company also intends to keep a majority stake in Vantage Towers after the IPO, with an eye on the strategic nature of the tower infrastructure and the potential for further value.

Despite the complexity and costs of its plans, the company remains a cash generative behemoth, guiding free cash flow for the year of at least €5 billion. 

This is a major driver of Vodafone’s ability to continue with its dividend. The current yield of just under 7% is extremely punchy, both in comparison to many of its blue chip peers and also given the low interest rate environment.

Some of this yield is a factor of a faltering share price of late, but nonetheless the attraction to income-starved investors is clear. 

However, challenges remain which the company is striving to fix.

The pandemic has hurt roaming and visitor revenues in particular, while lower handset sales have also been a headwind on income, such that overall group revenues declined by 2.3% in the period. 

The net debt figure remains high, although improved in the period and with the further potential of Vantage Towers proceeds to come. 

• Shares round-up: Rolls-Royce, BT, Vodafone
• Take control of your retirement planning with our award-winning, low-cost Self-Invested Personal Pension (SIPP)

Overall, the industry remains one where, for customers, price dominates, regardless of the improvements which individual service providers may be making under the bonnet.

The commercial progress which Vodafone is making is nonetheless becoming clearer. 

Excluding roaming, second quarter service revenues increased by 1.5%, which is promising for post-pandemic prospects. 

The share price has yet to react to such potential, however, dropping by 19% in the year to date, despite a spike of 22% since the March low. 

Over the last year, a decline of 28% compares to a drop of 13.5% for the wider FTSE 100 and underlines the difficulties the telecoms sector has been up against.

Even so, Vodafone remains a firm favourite on recovery prospects for investors, who are being paid to wait in the meantime with the generous dividend yield. 

The market consensus of the shares as a strong ‘buy’ has yet to be fully justified but nonetheless remains in place for the time being.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.