Vodafone share price tumbles after dividend cut report

Share price in Vodafone has taken a 4.5% hit during the opening hours of trading as rumours over a cut in dividend emerge.

Although several telcos have veered away from the dangers of cutting a dividend, The Sunday Times is reporting Vodafone is on the verge of making the announcement. With fourth quarter results scheduled for tomorrow morning, the team only has a short period of time to fend off unwanted questions.

Vodafone is currently one of the most attractive investments in the FTSE thanks to higher than average dividend payments to investors, though that might all be about to change. Some analyst firms are suggesting the cut could be as large as 50%, taking the dividend down from 15 pence per share to 7.5 pence. At the time of writing, Vodafone’s share price had declined 4.53% from the closing price on Friday afternoon.

The Vodafone share price has been steadily declining over the last 12-18 months, though any more downward movement could take it to the lowest since the fallout of the financial crisis in 2008.

The cause of the dividend cut is most likely to be due to the demands of 5G deployments across Europe. Although Vodafone is in a very strong position in multiple markets across the continent, this creates a difficult position when it comes to funding the funds to fuel future-proof infrastructure investments.

The challenge which Vodafone is specifically facing is spectrum. With auctions in Italy and Germany set to push the price of spectrum further north, telcos in the markets will be scrapping and scraping to secure a war chest deep enough.

It might not be the most exciting part of the mobile connectivity segment, but spectrum is one of the most critical. The assets could potentially define the success of a telco in the future 5G world, and numerous executives have already bemoaned the process of securing the frequencies. Some are complaining of the scarcity, and others of the price. Spectrum is central to 5G plans, and it’s not cheap.

This current predicament has been predicted however. Back in January, RBC Capital Markets suggested Vodafone might be in a precarious position due to years of restructuring, M&A, as well as exposure in up-coming spectrum auctions.

“Its underlying markets remain ‘challenging’ and it has very little financial headroom despite synergies and cost cutting,” the investor note stated. “Vodafone has options with its towers but faces a threat from 5G spectrum. The dividend is unsustainable even before we consider a macro downturn.”

RBC estimated securing the relevant licences could cost Vodafone between €4.5 billion and €12 billion, and even suggested investors should sell Vodafone shares ahead of a potential dip.

These are of course rumours for the moment, though there is enough support to justify the dip in share price. Only tomorrow’s results will tell.