5th Feb 2024 11:15
(Alliance News) - Shares in Vodafone Group PLC slipped lower on Monday, after a third-quarter trading statement that raised concerns about progress at its German business and the sustainability of its dividend.
The Berkshire, England-based telecommunications company reported total revenue for the quarter ended December 31 was EUR11.37 billion.
This represents a 2.3% decrease from EUR11.64 billion in the third quarter of financial 2023, but a 4.2% rise on an organic basis.
Germany, the group's largest market, saw revenue grow by 0.3% to EUR2.89 billion in the recent quarter from EUR2.88 billion a year before.
Russ Mould at AJ Bell said that in recent years Vodafone has been a business with "all the alacrity of a beached whale" and there's nothing in its third quarter statement to get investors "particularly excited".
He noted that Vodafone is trying to shed some "dead weight" with the firm still in active discussions for its Italian business despite turning down a merger offer from rival Iliad SA last week.
Matt Britzman, an equity analyst at Hargreaves Lansdown, said that, while there's scope for upside in the region if a deal can be found, "whether that would translate to a meaningful share price reaction remains to be seen".
"Deals in the UK and Spain failed to stir up too much excitement," he pointed out.
Mould said another area that will "cause some concern" for investors is the slowdown in the recent recovery in its German business – the largest contributor to the group.
German service revenue grew 0.3% in the quarter, slowing from growth of 1.1% in the second quarter, reflecting business phasing and non-recurring revenue from service providers.
HL's Britzman said the sustainability of the dividend also is being questioned.
He pointed out that while Vodafone looks cheap by most measures, with a forward yield of 9.2%, an argument can be made that the dividend is under some pressure in the near term.
He explained a capital allocation review is on the cards post-completion of the sale of its Spanish assets and noted "some analysts are already pencilling in dividend cuts as a result".
Richard Hunter at interactive investor pointed out the net debt pile is "one of some concern for investors".
He noted adjusted earnings have barely covered the dividend payout and a dividend cover of 0.9 times at the moment "is significantly shy of the 1.5 which is widely considered to be the minimum figure of comfort".
AJ Bell's Mould added that Vodafone could be stymied in its ambitions to scale up its mobile operation in the UK as its deal with Three comes under the spotlight of the competition authorities.
"The UK's CMA has proven itself to be robust of late and there is a risk the probe could either sink the deal entirely or introduce mitigations which will undermine its attractions. History does not provide an encouraging guide for Vodafone given the precedent of a tie-up between O2 and Three being turned down in 2016," he pointed out.
The Competition & Markets Authority on Friday said it is launching a phase one investigation looking into the merger of Three UK and Vodafone's UK business. The competition watchdog said it will be looking at whether the proposed deal could damage competition for consumers and businesses.
Shares in Vodafone were down 0.3% to 68.43 pence in London on Monday.
By Jeremy Cutler, Alliance News reporter
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