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Vodafone: Dividends up 2%

Steve Clayton | 17 May 2016 | A A A
Vodafone: Dividends up 2%

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No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.

Vodafone Group plc USD0.20 20/21

Sell: 114.16 | Buy: 114.20 | Change -0.68 (-0.59%)
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Full year results to Mar 31 show Group service revenues rising 1.5% organically, but currency movements convert that to a 3.5% fall, to £37.2bn. EBITDA rises by an underlying 2.7%, to £11.6bn on margins a fraction better at 28.3%. Underlying profit declined by 21% to £1.74bn but a hugely reduced tax rate of 15.1% (2015: 29.4%) meant that adjusted earnings per share only declined by 9.2% to 5.04p.

The shares rallied 2% on the news.

With Project Spring completed during the year, capex fell 6.5% to £8.6bn and the group generated free cash flow of a billion pounds. Currency movements and the cost of acquiring spectrum saw net debts surge 31% to £29.2bn. The company declared a full year dividend of 11.45p up 2.0%. In future years, Vodafone will report in euros and declare dividends in euros, to be paid in sterling to UK holders.

The euro equivalent to the dividend this year is 14.48 eurocents, which will be the baseline for future dividends. The company intends to pay annual increases in the dividend from this level.

CEO Vittorio Colao expressed confidence in the group's growth prospects, predicting EBITDA growth of 3-6% for the year ahead, assuming constant FX rates and at least EUR4.0bn of free cash flow. The company is raising its expected levels of capex to the mid-teens % of revenues, higher than previously guided.

Our view:

Vodafone consists of a recovering European business, but that recovery is still far from uniformly spread. Its AMAP division serves fast-growing countries like India and Turkey, where often, mobile phones are the primary form of communication, because fixed line infrastructure never got built. In Europe, Vodafone is aiming to provide services across mobile, broadband and fixed lines, often with TV services too.

Data growth is very strong, but it is hard to see that it is translating into extra revenues. Vodafone's challenge is to charge adequately for the increasing data it is distributing. Network consolidation, as is happening in the UK could provide respite.

The stock offers a yield of circa 5.1% and the board are targeting dividend growth, although this looks likely to be only modest. A eurozone economic recovery would help here. It is easy to look at Vodafone's stock price performance and consider it to have been a bit of a dullard for many years. But when dividends are reinvested, the picture changes; over the last decade, the stock delivered a capital gain of 2.6% p.a. but had the dividends been reinvested, the total return would have been 11.5%p.a. (Source: Bloomberg).

The market may be spooked by the rising capital expenditure and the fact that mobile organic service revenues are still in decline, despite the billions spent on Project Spring. The Board's assertion that dividends will rise each year only really stacks up if Vodafone can eventually restore the business to reliable growth in revenues and earnings. Eurozone recovery plays are few and far between in the UK market and Vodafone is easily the largest and most liquid that we can identify. That yield means you are sort of being paid to wait, to see if Mario Draghi can turn the Eurozone ship around.

Trading Details:

In Europe, organic service revenues declined 0.6% over the year, reflecting tough competitive conditions, but there was an improving trend, with Q4 seeing 0.5% growth as Germany and Italy returned to growth. But mobile service revenues declined throughout, down 2.0% for the year and 1.1% in the final quarter, with competition in the Enterprise market cited as a particular driver. Fixed line revenues rose 3.5% for the year and 5.4% in Q4, with 1.1m broadband additions, taking the European total to 12.3m. Organic EBITDA growth in Europe was 1.7% to £7.7bn.

The AMAP division saw organic service revenue growth of 6.9% for the year, improving to +8.1% in Q4. Turkey was the stand-out, at almost 20% growth, whilst Indian organic revenue growth was limited to 5.0%. Data saw strong growth of 74% as the 3G & 4G user base rose 18%, helping the overall user base rise by 8.2m in H2 to 341m users.

Capex. Project Spring, a multi-year, multi-billion pound investment programme to raise service levels and network speed, capacity and resilience is now complete. Vodafone say they can see further opportunities to invest, with the aim of driving growth and are increasing their pace of capex to a mid-teens % of revenues, whilst also launching a series of efficiency initiatives.

Balance Sheet: Net debt increased by £6.9bn after an £8.6bn increase the year before. The cost of equity dividends was almost 3x the free cash flow generated by the group, but with free cash flow of EUR4bn predicted this year, Vodafone look to be moving toward a period when the dividend is covered by cash flows.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.