Earnings: Vodafone shares unmoved by big dividend prospects

Vodafone (LSE: VOD) shares offer one of the FTSE 100Big dividend in 2023. The telecom giant published its third quarter update. And, near the end of the financial year, analysts predict an 8% dividend yield.

These forecasts should also be maintained over the next few years. But even the prospect of fat dividends has not attracted the attention of investors. Vodafone’s share price over the past 12 months is 30%. And it’s down 58% in five years.

Vodafone reported a decline in service revenue in Q3 in its European segment, with Germany, Italy, and Spain all down. That, however, is generally expected. UK revenue rose in the quarter. And it helped boost total organic revenue by 2.7%. But figures like these aren’t exciting investors who want to see strong cash flow to pay dividends.

Costs and synergies

Chief executive Margherita Della Valle spoke about “simplify our structure to give local markets complete autonomy and responsibility to make the best commercial decisions for our customers“.

He added that the company has “initiatives are underway to generate around half of the €1 billion cost savings target“.

This highlights one of the problems I have when trying to get my head around Vodafone as a company. In short, it does not look like one. However, it seems like there are many individual companies scattered around the world. That’s not necessarily bad in itself, mind.

competition

I also fail to see how Vodafone differentiates itself from the competition. This applies to global groups, as well as to individual country operations.

As far as I can tell, when people shop around to choose a mobile phone operator, they are looking for one main thing. They want to know who offers the most minutes and the most data for the lowest price. Oh, and maybe what phone is bundled with any offer.

Firms forced to compete on price will experience almost constant margin pressure. And, as we saw at Vodafone, under cost pressure too.

Guidance

Vodafone’s full-year guidance suggests adjusted EBITDAaL of between €15bn and €15.2bn. This will result in adjusted free cash flow of around €5.1bn. That might sound like a decent amount of cash. But at the halfway stage, Vodafone carries a net debt of 45 billion euros.

Despite huge debt and a rush to cut costs, Vodafone still pays a good dividend. And also participate in the share buyback program. The buyback is to counteract the dilutive effect of the previous bond issue. But still more cash out. I don’t understand Vodafone’s cash management strategy.

Verdict

I like to carry houses that yield 8% dividends. But I just don’t have enough confidence in its long-term sustainability.

However, against the bearishness, Vodafone kept proving me wrong. It still pays dividends. If the company can continue to do that, the shareholders can happily bring the money and not listen to me.