Many investors will probably have come to know Vodafone (LSE: VOD) as a bit of a sector laggard over the last 12 months, given that the group has persistently underperformed much of its peer group in terms of both its financial results as well as shareholder returns.
Now, with the share sinking to a 12-month low after management officially shelved tie-up talks for the time being between themselves and Virgin Media’s owner Liberty Global, it isn’t difficult to see how some investors may be beginning to lose patience with the shares…
Quad-play is the word of the day
One of the most powerful trends shaping the telecoms market at the moment is the ongoing shift toward so called unified communications, otherwise known as Quad Play packages, which have formed the prompt for the current wave of M&A activity that is sweeping across the industry.
Traditionally, there has been little demand for Quad-Play packages in the UK and, as such, Vodafone’s investment in this area has been almost non-existent on home soil to date. However, the group did make a belated entry into this space in Europe when it bought Germany’s Kabel Deutschland and Spain’s ONO during the 2013/14 years.
These purchases were the result of a persistent decline in Vodafone’s position within core European markets as consumers began to shun single service providers in favour of cheaper multi service retailers.
Although it remains squeezed by low prices, which are the predominant source of pressure upon service revenues, Vodafone’s belated move into the quad-play arena has enabled it to slow the exodus of its European customers.
Will it pay off in the long term?
With this strategy appearing to yield results in Europe, it now seems that history is beginning to repeat itself as BT (LSE: BT-A) continues its push to acquire EE, a move which could create the UK’s largest multi service operator if successful.
Following on from this, Vodafone has since announced that it will be launching its own pay-TV and fixed broadband services in the UK later this year, in a move that many view as a desperate attempt to defend its customer base against an expanding BT.
Understandably, there has been some level of speculation that this could see price competition across the communications spectrum increase during the coming quarters, which may be bad for earnings, while potentially leading to higher levels of customer attrition for Vodafone in the medium term.
However, if Vodafone’s pay-TV play does pay off then it could not only consolidate its position in mobile telecoms, but also diversify and grow the business simultaneously.
Fight or flight?
While there are plenty of reasons for investors to cling onto Vodafone shares, particularly those with extended time frames, such a move would not be without risks in the near to medium term.
Most notably because, Vodafone’s £19 billion two-year investment programme is expected to reduce 2015 earnings to somewhere in the region of 4.0p per share, while those for 2016 are projected at just 7.02 pence as a further consequence.
This means that the group will not be able to cover its dividend from earnings at any point in the next two years, which elevates the risk of disappointment for shareholders, particularly in the event that the business embarks upon another downturn or if UK pay-tv is slow to gain traction.
For me personally, I can’t help but think that for anybody who is looking to buy Vodafone shares, the above earnings outlook is likely to mean that there will probably be a better time than the present.
It is for this reason that I will probably elect to leave them on my watch list for the time being, although admittedly I will wait keenly to see whether this proves overly cautious of me or if such wariness is warranted.
