Vodafone ditches Kiwis and cuts dividend in search of ‘financial headroom’

Vodafone has announced the sale of its New Zealand arm and a cut to the dividend as the firm searches for spreadsheet breathing room amid the Liberty Global acquisition, annual loss and spectrum auctions.

Such is the precarious position Vodafone is under, a cut to the dividend was expected by many analysts, though the sale of its Kiwi business unit compounds the misery. Facing various challenges around the world, including expensive spectrum auctions in Europe, the telco giant is searching for financial relief, though whether these moves prove to be adequate remains to be seen.

“We are executing our strategy at pace and have achieved our guidance for the year, with good growth in most markets but also increased competition in Spain and Italy and headwinds in South Africa,” said Group CEO Nick Read. “These challenges weighed on our service revenue growth during the year, and together with high spectrum auction costs have reduced our financial headroom.

“The Group is at a key point of transformation – deepening customer engagement, accelerating digital transformation, radically simplifying our operations, generating better returns from our infrastructure assets and continuing to optimise our portfolio. To support these goals and to rebuild headroom, the Board has made the decision to rebase the dividend, helping us to reduce debt and deliver to the low end of our target range in the next few years.”

While the news of a dividend cut saw share price drop by more than 5%, trading prior to markets opening has seen a slight recovery (at the time of writing). The dividend cut is not as drastic as some had forecast, down to 9 euro cents from 15, while an additional €2.1 billion from the New Zealand sale will provide some relief.

Looking at the financials for the year ending March 31, group revenues declined by 6.2% to €43.666 billion, while the operating loss stood at a weighty €7.644 billion. This compares to a profit of €2.788 billion across the previous year, though there are several different factors to take into consideration such as the merger with Idea Cellular in India and a change in accounting standards.

The loss might shock some for the moment, though this is likely to balance out in the long-run. In changing from the IAS18 accounting standard to IFRS15, Vodafone is altering how it is realising revenue on the spreadsheets. From here on forward, revenues are only reported as each stage of the contract is completed. It might be a shock for the moment, but more revenue is there to be realised in the future.

Although these numbers are the not the most positive, there is a hope on the horizon.

“The dividend cut is a massive blow for investors, while the results highlight the on-going challenges facing the company in its quest to turnaround its fortunes,” said Paolo Pescatore of analyst firm PP Foresight. “All hopes seem to be pinned on 5G, but the business model is unproven. Huge investment is required to roll out these new ultra-fast networks, but it comes at a cost.”

On the 5G front, Vodafone UK has announced it will go live on July 3, initially launching in seven cities, with an additional 12 live by the end of the year. Vodafone will also offer 5G roaming in the UK, Germany, Italy and Spain over the summer period. Interestingly enough, the firm has said it will price 5G at the levels as 4G.

Although this is a minor consolation set against the backdrop of a monstrous loss, it is at least something to hold onto. As it stands, Vodafone is winning the 5G race in the UK, while the roaming claim is another which gives the firm something to shout about. Vodafone is not in a terrible position, though many will be wary of the daunting spectrum auctions it faces over the coming months.