Vodafone (LSE: VOD) shares offer one of the FTSE 100‘s big dividends in 2023. The telecoms giant has just posted a third-quarter update. And, this close to the end of the financial year, analysts are predicting a whopping 8% dividend yield.
Forecasts suggest it should be maintained over the next couple of years too. But even the prospect of such a fat dividend has not been attracting investors. The Vodafone share price has fallen 30% in the past 12 months. And it’s down 58% over five years.
Vodafone reported declines in service revenue in Q3 across parts of Europe, with Germany, Italy, and Spain all down. That was, however, largely expected. UK revenue did grow in the quarter. And it helped boost total organic revenue by 2.7%. But figures like these don’t seem to be exciting investors who want to see strong cash flow to pay the dividends.
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Costs and synergy
Chief executive Margherita Della Valle spoke of “simplifying our structure to give local markets full autonomy and accountability to make the best commercial decisions for their customers“.
She added that the company has “initiatives underway to generate around half of our €1 billion cost savings target“.
This highlights one of the problems I’ve always had when trying to get my head around Vodafone as a company. In short, it doesn’t look like one. Instead, it looks like a whole load of individual companies scattered around the world. That’s not necessarily bad in itself, mind.
Competition
I also can’t really see how Vodafone differentiates itself from the competition. That applies to the global group, as well as to individual country operations.
As far as I can tell, when people shop around to choose a mobile phone operator, they’re 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 phones come bundled with any deals.
Companies that are forced to compete on price will be under almost perpetual margin pressure. And, as we see at Vodafone, under cost pressure too.
Guidance
Vodafone’s full-year guidance suggests adjusted EBITDAaL of between €15bn and €15.2bn. That should 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 carried a massive €45bn in net debt.
Despite that huge debt and the urgency of cutting costs, Vodafone is still paying handsome dividends. And it’s also engaged in a share buyback programme. The buyback is to counter the dilution effects of earlier bond issues. But it’s still more cash going out. I don’t understand Vodafone’s cash management strategy.
Verdict
I’d love to take home that 8% dividend yield. But I just don’t have enough confidence in its long-term sustainability.
Still, against my bearishness, Vodafone does keep proving me wrong. It keeps on paying the dividends. If the company can continue to do that, shareholders can happily carry on pocketing the cash and not listening to me.
