The UK stock market has had a terrific run in 2024 so far. While things have cooled off on the back of the General Election, the FTSE 100 is still up by 8.5% since the start of the year including dividends. That’s obviously a welcome sign, given the lacklustre performance delivered since inflation reared its ugly head in late 2021. Yet sadly, not all of Britain’s leading businesses have been so fortunate.
Shares of Vodafone (LSE:VOD) seem to have been left behind, growing by a measly 1% over the same period. By comparison, one of its chief competitors, BT Group, is up almost 13%. Like many companies with highly leveraged balance sheets, Vodafone appears to be struggling under its own weight. And it’s why I’m not planning on adding the shares to my portfolio any time soon. But is there hope for the long run?
What’s going on with Vodafone shares?
Just like BT, Vodafone is a company that was mismanaged for years with numerous failed turnaround attempts under its belt. In 2023, the business once again brought in a new CEO, Margherita Della Valle, to try and right the ship. And to her credit, Della Valle has made progress.
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An organisational restructuring has seen the telecoms giant’s Spanish and Italian segments getting sold off. And just last month, the firm sold 485m shares of its investment in Indus Towers Limited to raise another €1.7bn.
Management’s strategy revolves around improving the balance sheet while refocusing the business on the UK, Germany, and Africa. The latter region is particularly exciting given its M-Pesa digital payments platform adoption is spreading like wildfire. As such, this region now generates a fifth of the firm’s top-line revenue.
Meanwhile, with the economic conditions in the UK improving, growth (albeit modest) has also made a comeback. But if that’s the case, why has the Vodafone share price continued to limp on while the rest of the stock market surged? The answer appears to lie in Germany.
Underperformance in Europe
Inflation has been problematic for businesses worldwide. However, for telecoms companies, inflationary operating expenses are typically quickly passed on to customers. Unfortunately, in Germany, Vodafone appears to be struggling on that front.
Its latest results saw revenue coming in flat, underperforming the country’s inflation rate. At the same time, higher energy costs and employee salaries have dragged margins down. It seems customers are starting to switch to cheaper alternative providers in Vodafone’s primary market. Needless to say, that’s quite a big problem.
A chance for a comeback?
Offering cheaper deals in Germany could be one viable strategy to recapture lost market share. However, in order to afford such a move, the firm’s debt burden needs to come down significantly.
To management’s credit, progress has been made on this front, with total debt & equivalents falling from €65bn to €57bn between September 2023 and March 2024. However, that’s still a massive liability to contend with. And investors are already feeling the pressure, given that dividends have just been cut in half to prioritise debt reduction.
Providing the strategy continues to deliver significant debt reduction in the coming years, Vodafone may be able to bounce back stronger than before, along with dividends. However, this task is hardly simple. And with other companies to pick from, Vodafone isn’t a stock I’m eager to start buying right now.
