Vodafone (LSE: VOD) has been having a terrible time in India, and its future in that country could now be in doubt after the Supreme Court ruled against it in an ongoing case over licence fees and taxes.
The adverse judgment plunged the telecoms giant to a loss of €1.9b for the first six months of the year, and Vodafone is now “actively engaging with the government to seek financial relief.” Its continued presence in India could hinge on the outcome of that, with the company having been in constant dispute with authorities over tax and regulation in recent years.
Growth
In better news, first-half organic revenue rose by 0.3%. That’s maybe only a modest improvement, but it represents a return to growth in the second quarter of 0.7% (after the Q1 figure had slipped 0.2%). Vodafone has updated its full-year guidance too, and is now expecting adjusted EBITDA in the range of €14.8b to €15.0b, up from a previous estimate of €13.8b to €14.2b.
The overall boost to optimism generated from Vodafone’s return to growth pushed the share price up 3% on the morning of the results.
Dividend watchers will have their eyes focused on cash flow, and expectations have been pegged back slightly to around €5.4b, from a previous suggestion of “at least” that figure. Cash flow is, unsurprisingly, set to be impacted by the India judgment.
After the company (finally, sensibly) reduced its dividend payments last year, after years of paying out more cash than it was earning and keeping the yield unsustainably high, the pressure should be off now and I think the currently forecast 4.8% yield should be safe. The announcement of an interim dividend of 4.5 euro cents per share, representing 50% of last year’s total dividend, would seem to reinforce that.
Dividend policy
That’s not to say it’s rock solid, mind, as it would only just be covered by earnings this year, with cover reaching only around 1.3 times based on earnings forecasts for the year to March 2021.
Vodafone is a company in a capital-intensive industry, and is investing in rolling out its 5G offering, which has now been launched in seven European markets – and it should reach nine European markets by the end of the current financial year.
On top of that, Vodafone’s net debt figure ballooned to more than €48b at 30 September, up from a little over €32b a year previously.
When I put those two together, and I don’t know if I’m the only one who’s concerned about it, I really can’t see the sense in paying out such big dividends.
Bull run?
Still, Vodafone looks like it’s reversed the bearishness that resulted in the steady share price slide since the end of 2017 and resulted in a slump of nearly 50% by a low point in May 2019. Since then, the price has put on 35%, and I see the shares as being on a more sustainable valuation with a forecast price-to-earnings ratio dropping to around 16.5 by March 2021. Back in 2016 we were looking at P/E multiples of around 40, which I thought was crazy at the time.
Would I buy the shares now? No, because I’m disturbed by the huge debt pile, and Vodafone’s inscrutable dividend policy still has me scratching my head.