A Slow, Painful Death For Vodafone Group plc?

It takes a huge leap of faith to invest in Vodafone (LSE: VOD) (NASDAQ: VOD.US) these days. It doesn’t take much to realise that.

Investors tend to have short memories, but they ought to remember how the British group has performed since the beginning of the century in spite of significant operational changes. Incidentally, its stock trades bang in line with the level it recorded in mid-2001.

Trailing Figures

Vodafone announced today its results for the year ended 31 March 2014. 

What to like: Vodafone is a pure dividend play. “Final dividend per share of 7.47 pence, giving total dividends per share of 11.0 pence, up 8%,” it said. Since its stock has been recently hammered, it offers a yield of almost 9%.

What to dislike: Revenues are down, operating profitability is shrinking, impairments are still problematic. Its free-cash-flow profile is decent but it is not reassuring. Investment is needed.

Reaction: The stock is down 4.10% at 11.28 BST.

What’s Next

Is it really important how trailing financials look like for a company in the midst of massive overhaul of its business? If so, other figures deserve attention.

In 2001, Vodafone reported revenue of £15bn, i.e. about one third of its revenue in the last 12 months.

Vodafone has surely changed since the early years of the century, but even growing revenue between 2005 and 2012 has not been enough to boost profitability, which has been deteriorating for almost a decade now. In the last nine years alone, its operating profit has dropped by almost 12 percentage points.

For such a capital-intensive business, this is a massive headache. It’s virtually impossible to estimate whether the “New Vodafone” will be able to buck that trend because nobody can firmly say how Vodafone will look like in a couple of years.

Vodafone has always been a collection of assets that have never worked well together. Its asset base has changed over years with little benefits to shareholders. It’s running the risk of adopting a new strategy that will yield a very similar result.

Market and M&A Risks

A U-turn of the business comes at a time when market risk is alive and well.

Investors are wary of volatility swings: the VIX Index is still very low but could spring back in a flash. In this context, betting on a restructuring story would not be wise.

After the disposal of its stake in Verizon Wireless, Vodafone acquired Spain’s Grupo Corporativo Ono for $10 billion. A war chest allows it to pursue more deals.

As such, it is a high risk/high return investment, particularly since any possible interest from AT&T has vanished; the telco giant has decided to splash out $50 billion to snap up DirecTV.

Vodafone is changing so fast that any attempt made at valuing the business would be illusory. A fast-changing competitive landscape renders any such attempt completely worthless in the short term but it’s unlikely that Vodafone will generate returns able to cover a cost of capital that could be as high as 8%. Analysts and investors alike should remember that.