It was once the darling of investors – including Neil Woodford, who held the shares for some years in his Invesco Perpetual High Income fund — but Vodafone (LSE: VOD) (NASDAQ: VOD.US) has fallen out of favour of late.
Vodafone was, in fact, the first addition I made to the Fool’s Beginners’ Portfolio back in May 2012 at a price of 168.5p, when I thought it was a seriously undervalued company that had a solid commitment to escalating its dividend payments.
Sold out
Mr Woodford, concerned about the company’s ability to maintain its high margins, sold out in February 2013. But I held on and enjoyed a bit more of a share price rise before finally selling in December at a price of 233.9p, happy to pocket a 39% profit.
I was disappointed by Vodafone’s reversal from its previous progressive dividend policy to only paying at least as much as the previous year, leaving the distinct possibility of no dividend rise at all. My timing was fortuitous, with the shares having tumbled 15% since then to 198p.
After Vodafone sold its stake in Verizon Wireless to Verizon Communications in a very good deal for shareholders, the focus shifted to who was going to buy Vodafone — AT&T was raised an an interested party, but nothing has come of that yet.
How is Vodafone doing?
There’s a massive 60% fall in earnings per share (EPS) forecast for the year to March 2015, down from 2013’s 17.5p to just 6.8p. That would leave a dividend of the same 11p paid last year high and dry — barely 60% covered by earnings. And there’s no significant EPS recovery expected in 2016.
First quarter figures to June reiterated the cause of the problems.
Vodafone is still highly dependent on service revenues in developed countries, and that was down across the board, with a 7.9% fall in Europe. Service revenue was down 3.2% in the UK and 4.9% in Germany, but the southern states fared worse — there were falls of 16% in Italy and 15% in Spain.
Vodafone saw a 10% rise in service revenues in India and 3.7% from Turkey, but that’s clearly not enough to keep profits up.
The wilderness years
To return to those heady years of profit rises, Vodafone has to get its leading-edge high-tech act together, and with those Q1 figures chief executive Vittorio Colao did point to “capex nearly doubling year-on-year, and our 4G coverage in Europe up 20 percentage points to 52% in the last nine months“.
Of course, that is money going out, and it puts further pressure on dividends — perhaps that earlier backtracking was a presage of something more serious.
Vodafone clearly had to get its 4G coverage up to scratch, and I can see a return to earnings growth when that happens. But in the meantime, I see a few wilderness years of little or no earnings growth — and I just can’t see dividends at current levels being sustainable.