Mobile giant Vodafone (LSE: VOD) has announced this morning that management has decided to do some more housekeeping by moving the group’s 35% stake in Kenyan operator Safaricom to Vodacom, its listed South African company.
This €2.3bn transaction is the latest in Vodafone’s attempts to streamline the company as, over the years, Vodafone’s international expansion has left the group holding a host of businesses around the world, which it does not fully control due to joint venture/foreign ownership restrictions. The company has also partnered with local competitors in some markets to help improve its operating performance.
One such partnership is Vodafone’s recently announced deal to merge its Indian operations with local rival Idea Cellular, creating India’s largest mobile network valued at more than $23bn with 400m users and a 35% share of the market. Vodafone will own 45.1% of the new business and should help the group reduce its debts by €8bn. However, this deal has come at a cost.
Costly expansion
In many ways, Vodafone has been forced to merge its Indian operations with the local operator after announcing a €6.4bn writedown on the value of its local assets at the end of last year. This enormous loss means that the company is now expected to report a pre-tax loss of between €3.8bn and €4.9bn for the year to the end of March.
Nonetheless, despite these woes, the company’s financial position is actually improving, and there’s no need for investors to fret about the sustainability of the dividend payout.
Stronger balance sheet
Excluding one-off costs, Vodafone is expected to report underlying profits of €13.8bn, down from €15.8bn the previous year, while the firm’s dividend is seen rising to 14.63 cents from 11.45 cents. It Vodafone’s simplification programme, along with its €8bn debt reduction, should only improve dividend sustainability. At the end of September 2016, Vodafone reported a total debt figure €55.5bn. At an interest rate of 5% per annum, this debt costs an estimated €2.8bn annually to maintain. Reducing debt by €8bn following the Indian merger should see Vodafone’s annual interest bill fall by around €400m. Further, the company should be able to reduce operating and marketing costs for its operations in India and Africa thanks to recent deals.
Put simply, even though it might seem as if a multibillion-euro loss will put Vodafone’s dividend in jeopardy, there’s no reason for investors to worry. As a telecoms company, Vodafone’s income statement is not wholly representative of the firm’s financial position as non-cash charges such as depreciation are significant. Instead, Vodafone’s cash flow statement is much more representative of the company’s ability to maintain its dividend distribution.
Using this method, it’s clear Vodafone isn’t going away anytime soon. For the last reported fiscal year, to March 31 2016, the company generated €12.4bn in cash from operations while the dividend only cost a total of €3.5bn. Overall, income investors can rest safe in the knowledge that the current dividend yield of 6.3% looks extremely safe.