Three Things to Loathe About Vodafone Group Plc (ADR) (VOD)

LONDON — There are things to love and loathe about most companies. Today, I’m going to tell you about three things to loathe about Vodafone Group Plc (ADR) (NASDAQ:VOD).

I’ll also be asking whether these negative factors make this FTSE 100 telecom titan a poor investment today.

Southern Europe

No less than 24% of Vodafone Group Plc (ADR) (NASDAQ:VOD)’s revenue and 30% of operating cash flows come from the pariah economies of southern Europe. Offhand, I can’t think of another FTSE 100 company with that level of exposure to Portugal, Italy, Greece, and Spain.

How long will it take the so-called PIGS to fix their broken economies? Many years, one would imagine. Vodafone will have to try to forge ahead while dragging a dirty great anchor behind it.

Cash flows

Vodafone Group Plc (ADR) (NASDAQ:VOD) has developed cash-flow problems of late. The board has guided on free cash flow for the current year of 4.9 billion pounds from operations it controls, plus there’s 2.1 billion pounds from U.S. joint venture Verizon Wireless, in which Vodafone has a 45% equity stake. So, total free cash of 7 billion pounds for the year.

Vodafone Group Plc (ADR) (NASDAQ:VOD)’s dividend payout to shareholders will cost an annual 5 billion pounds going forward — and that’s if the dividend is never raised again. License and spectrum payments, which, like the dividend, come out of free cash flow, have averaged 2.3 billion pounds a year for the past three years. Analysts reckon the annual spend will average not much less than that for the next 10 years. So, dividend, license, and spectrum payments amount to about 7 billion pounds a year — the same as expected free cash flow for 2013.

At current run-rates, then, Vodafone Group Plc (ADR) (NASDAQ:VOD)’s shareholders are worryingly reliant for their dividend on uncertain and unknown levels of distributions from Verizon Wireless. Vodafone has no say on whether the U.S. company will continue to distribute excess cash, or on how much cash it will distribute, if it does.

Will it or won’t it

Vodafone’s cash problems would be solved in one fell swoop if it sold its stake in Verizon Wireless. Wireless’ parent Verizon Communications Inc. (NYSE:VZ) has made no secret of the fact it would like to get its hands on Vodafone’s stake.

If a deal is done, Vodafone could possibly net in excess of $100 billion. Wow! But then comes the question of whether that vast sum would be spent wisely or squandered.

Unfortunately, Vodafone’s track record on acquisitions isn’t exactly good. Recall, in particular, the company’s history-making 79 billion  pound takeover of German group Mannesmann at the top of the market in 2000, and a subsequent — also history-making — 28 billion pound asset writedown. That was the most spectacular, but not the only, occasion on which Vodafone has overpaid in the past.

A poor investment

Whatever else can be said about Vodafone, one thing’s unarguable: Considerable uncertainty hangs over the company at present.