The Vodafone (LSE: VOD) share price has been languishing at what looks like a low valuation for ages.
Ex-growth and unloved, the stock has been locked in a strong downtrend driven by volatile earnings. On top of that, the firm’s huge debt-pile could have been adding to investors’ concerns.
However, today (16 January), the company made an announcement proving there may still be some life in the old dog.
A transformational deal?
The telecoms provider said it’s signed a 10-year strategic partnership with Microsoft and will invest $1.5bn over 10 years in cloud and customer-focused artificial intelligence (AI) services co-developed by the two firms. Also, Microsoft will use Vodafone’s fixed and mobile connectivity services.
The aim of the collaboration is to supply AI, digital services and the cloud “to more than 300m businesses and consumers”.
The plan is to “transform” the customer experience using Microsoft’s generative AI. On top of that, Vodafone will scale its new standalone internet of things (IoT) business with Microsoft.
The partnership will seek to expand digital services in Africa and Europe. Vodafone aims to grow enterprise turnover with new Microsoft services for small and medium-sized businesses.
Part of the plan involves Vodafone accelerating digital transformation and operational efficiencies by migrating virtual data centres to Microsoft Azure.
It’s quite a far-reaching tie-up between the two companies. Vodafone’s chief executive, Margherita Della Valle, said: “Today, Vodafone has made a bold commitment to the digital future of Europe and Africa.”
Meanwhile, chairman and chief executive of Microsoft, Satya Nadella, added: “This new generation of AI will unlock massive new opportunities for every organisation and every industry around the world.”
These are visionary statements from the top people. But it has to be said, the market was underwhelmed by the news with Vodafone’s share price barely moving on the day.
Poor dividend performance
For now, the well-established downward trend for the stock is still firmly in place. So let’s forget the hype for a few moments and look at the reality of shareholder dividends.
In a nutshell, there’s something to be concerned about its record. Since 2018, the dividend payment has halved and the compound annual growth rate of the shareholder payment is minus 10% — ouch!
Meanwhile, with the share price near 67p, the forward-looking dividend yield for the trading year to March 2025 is around 11%.
At first glance, a yield that high may seem attractive. But I see ultra-high yields as more of a warning than an opportunity. In this case, the woeful dividend record, patchy earnings and the falling share price all seem to back up a cautious stance.
There’s no doubt Vodafone has been ex-growth for some considerable time. However, the business does not look much like a solid back-up for the dividend either.
It’s possible this new tie-up with Microsoft to enhance Vodafone’s prospects going forward. However, the telecoms firm has a lot of work to do to turn around and stabilise its business.
For the time being, I’m cautious about Vodafone despite today’s announcement.
