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
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.
Southern Europe is an economic bog, and any deal on Verizon Wireless would produce a tectonic shift in Vodafone’s business — for better or worse, nobody can know. Then there’s the more prosaic matter of the dividend. Sure, the yield is good at 5.7% on a 180 pence share price, but there are serious questions about the sustainability of the payout.
At the end of the day: there are plenty of companies around with little or no exposure to southern Europe; plenty of companies that can thrive merely by continuing to do what they’re already doing; and plenty of companies offering an income of over 5%, but with more certain prospects of dividend growth.
The article 3 Things to Loathe About Vodafone Group (LSE:VOD) (NASDAQ:VOD) originally appeared on Fool.com and is written by G. A. Chester.
G. A. Chester has no position in any stocks mentioned. The Motley Fool recommends Vodafone.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.
