With coronavirus spreading, it’s been a volatile month for financial indices and listed companies.
FTSE 100 ups and downs
The FTSE 100 is no different and saw a low of 4,942 points yesterday down from 7,436 on February 20. Today it’s rising again and is back over 5,000 points in response to government intervention yesterday.
To calm the increasing market fear, the Bank of England lowered interest rates to 0.1% and started buying bonds in a £200bn orgy of quantitative easing.
For investors, although there are still many great companies listed on the stock market, attempting to buy low, could be like trying to catch a falling knife — difficult and dangerous.
Vodafone share price bounce
Vodafone (LSE:VOD) is one such company. The telecoms giant and household name has plenty going for it. But it’s also faced its fair share of challenges in recent years and I think that’s set to continue.
Last week the Vodafone share price was down 33% from the start of the year but has since bounced back up 16% at the time of writing. Fluctuations are par for the course in these unsettling times, and paying too close attention is overwhelming.
This £32bn company has negative earnings per share and a large debt pile. It has a dividend yield of 6.5% but had to resort to a 40% dividend cut in May last year. Although Vodafone’s financial outlook had been improving since the dividend cut, it’s still conservative.
Responding to market challenges
The UK and Europe are Vodafone’s main markets, already a highly competitive arena for telecoms companies. That competition creates price wars and puts pressure on Vodafone to keep its prices low.
Some of its markets are under heavier pressure than others. The devastation the coronavirus is causing in Italy, for instance, will have far-reaching economic effects that are not immediately quantifiable, but are unlikely to create economic growth.
Earlier this month the European Commission cleared the €10bn merger between Vodafone and Telecom Italia to roll out 5G infrastructure across Italy. This was looking like a good move. But getting 5G fully up and running will require a serious cash injection.
Meanwhile, there’s no denying that Vodafone services are in demand. Across its many markets, Covid-19 lockdowns are forcing many people to work from home, which is putting further pressure on data networks. It has already seen data traffic increase by 50% in some markets, underlining the importance of mobile networks to modern life.
In response, Vodafone is rolling out a five-point plan to help the communities affected by the spread of Covid-19 across Europe. This plan includes maintaining the quality of service; providing network capacity and services for critical government functions; improving information distribution to the public; facilitating home working and helping support businesses; and improving governments’ insights into people’s movements in affected areas.
Further to fall
After a 10-year bull run, a market correction was due. This has well and truly arrived, but fears are mounting that we’re now heading into an extended bear market.
I suspect the FTSE 100 may have further to fall and I’m not convinced this is a good time to buy Vodafone shares, but if you’re already a shareholder, I’d sit tight. I think it’s a company with a lot going for it, but it may have to lower its forecasts and the dividend could be at threat of further cuts.
