Vodafone looks to set new tone with full-year results

“Vodafone’s use of its own, preferred profit metrics and a new group structure pending two major disposals (and a possible merger) mean that understanding the business and the full-year results is trickier than ever, but the absence of any new profit warnings means no news is good news, especially as the plan to halve the dividend in the year to March 2025 is already well trailered,” says AJ Bell investment director Russ Mould.

“Vodafone is not offering much by way of increase in profits and cash flow in the coming year, judging by management’s guidance, but the business will look simpler, and the balance sheet will carry less debt as the company shrinks in an attempt to improve its long-term growth potential.

“Change in group structure, such as the Vantage Towers spin-off in 2020, the sale of its Ghanian, Qatari, Maltese and Hungarian assets and the 2019 purchase of Liberty Global’s Eastern European assets mean that getting a picture of the underlying trend in Vodafone’s operational performance is not entirely straightforward. The sale of its Spanish and Italian units in fiscal 2025 means they are not shown as discontinued units in the 2024 accounts, but the guidance offered by chief executive Margherita Della Valle suggests profits and cash flow, using Vodafone’s preferred measures, will be flattish in the coming year.

Source: Company accounts, management guidance for 2025E. Accounts under old structure to 2023, new structure from 2024 onwards. Financial year to March

“Nor does the prospect of a second dividend cut in seven years set the pulse racing, especially as the last increase in the annual distribution was 2018. Vodafone has already flagged its intention to halve the payment to €0.045 from €0.09 for the year to March 2025.

Source: Company accounts, management guidance for 2025E. Accounts under old structure to 2023, new structure from 2024 onwards. Financial year to March

“While painful, the cut looks a sensible move. It will free up more than €1 billion a year in cash flow and enable Vodafone to either further reduce debt or invest in its core operations to maintain and enhance their competitive position, in what remain fiercely contested markets such as mobile telephony, TV and broadband.

“Vodafone’s problem – and the ultimate explanation for why its shares are no higher now than in 1998 – is that it has been fighting on too many fronts, in too many markets, while it has been carrying too much debt that has crimped its ability to invest and compete fully across the board. The capital investment requirements to stay competitive meant the dividend was, ultimately, too big to defend, and hence the hefty cuts in 2019 and 2025.

Source: Company accounts

“Margherita Della Valle’s surgery tackles these strategic and financial challenges head on and may finally make a lumbering firm nimbler and better placed to stare down its competitors, especially if the UK’s Competition and Markets Authority clears the proposed merger with Three.

“A less competitive market could help profits and cash flow in the UK – although the regulator is yet to be convinced that will not come from higher prices, despite Vodafone’s protests to the contrary – and the asset disposals will also help to reduce debt.

“From an operational perspective, less debt lowers interest bills and frees up cash for investment or debt repayment. Vodafone also plans to use some of the disposal proceeds to fund up to €4 billion in share buybacks.

“From a share price perspective, less debt means less risk and less risk can mean a higher share price, or at least persuade investors to pay a higher multiple to access a company’s earnings and cash flow, all other things being equal.

Source: Company accounts

“Vodafone’s share price is hardly racing away, which may be no surprise given the limited growth outlook implied by the profit and cash flow guidance for 2025, but the major overhaul of the past year may just be stopping the share price rot. The next steps will be conclusion of the Italian and Spanish sales, plus the resolution, one way or the other, of the UK deal, and the shares may now tread water until the Competition and Markets Authority makes its decision.”

Source: LSEG Datastream

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