Lower group revenues and a reported loss couldn’t stop the share price from rising.
Vodafone signals reassuring performance as it maintains dividend
- Shares trading up 7% in early trading despite first half loss of €7.8bn as investors share relief at dividend upkeep.
- Still too early to evaluate new CEO’s performance but signs are encouraging as digital transformation accelerates and demand is high.
- We currently recommend Vodafone as a ‘buy’ for medium risk investors.
After a terrible share price performance since the start of the year, Vodafone provided a more reassuring set of half year results today. As expected, it reported lower group revenues and a reported loss of €7.8bn (which was significantly lower compared to last year) as a result of asset impairments and the loss on disposal of various businesses, mainly Vodafone India, while there were also foreign exchange headwinds.
There was the issue of higher levels of competition in Italy and Spain during the period however, investors should appreciate that the organic and adjusted figures were quite encouraging. Organic service revenues headed higher by 0.8%, while there was good momentum in fixed broadband. Demand from the emerging markets and Internet of Things helped to keep data demand heading higher. Overall, these numbers were better than what the market had anticipated and investors will be somewhat relieved to see that the share price this morning is trading higher by roughly 7%.
Nonetheless, the rally in the shares may be better explained by the fact that the dividend has been maintained, which many investors felt could have been chopped given the reported losses and the tough trading conditions the group has faced in various regions this year. The interim dividend was upheld at 4.84 eurocents while management intends to pay 15.07 cents for the full year.
Investors will also have been further reassured as the management narrowed their adjusted organic EBITDA growth to +3%. However, investors should acknowledge that the dividend for the time being is unlikely to grow further as the management have stated that it will only be raised when the net debt to EBITDA reaches 2.5-3x, currently it stands at roughly 4.5x.
We are still in the early days of Nick Read’s tenure as CEO, so it will be hard to judge his performance just yet. He has though, made some encouraging signs as he stated his focus will be on greater consistency of commercial executions, accelerating digital transformation, radically simplifying the operating model to generate better returns from the group’s assets. Together he expects this to drive revenue growth and lower operating costs by at least €1.2bn by 2021.
For investors in Vodafone, this morning’s results will have provided a little relief to the downward pressure on the shares we have seen this year. It will also have eased worries of the dividend which is very attractive, currently in excess of 8%. With the shares this low, we take the view that the shares are attractive priced for some investors taking a contrarian approach and seeking income while willing to accept a low to medium level of risk.
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