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Unless you are an unbending yield muncher… sell Vodafone here

By Chris Bailey of Financial Orbit | Tuesday 16 May 2017


Disclosure: I own shares in one or more of the stocks mentioned. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from ShareProphets). I have no business relationship with any company whose stock is mentioned in this article.


Near the top of the FTSE-100 leaderboard today is the telecoms behemoth Vodafone (VOD), which proudly said earlier today that it had enjoyed a ‘good year, gaining share’. Of course the headline profit numbers were full of the negative impact of a non-cash impairment of €5 billion relating to its Indian business. But don’t worry about this! ‘Organic adjusted EBITDA growth of 4%-8%’ is expected and, with €5 billion of free cash flow and a 2% hike in the dividend, the yield munchers will be bought off. Right here, right now though, I would sell Vodafone shares.

There was a time when mobile phones were sexy and you could pretend to be Gordon Gekko chatting into one, but today they are a commodity item and telecoms companies are having to become ‘TMT’ (telecoms, media, technology) corporates.

The last time you probably heard the acronym ‘TMT’ was probably during the dot com boom. I remember near the finale of this market mania being told by a neophyte fund manager how logical it was to buy Vodafone stock at 400p because it was going to become a bigger and bigger part of the index. As I had observed that the stock was already maxed out at 10% of the index, I sensibly did not take that advice but it highlights just how bad an investment the stock has been over the intervening seventeen odd years or so! Yes, the yield munchers will ramble on about dividends but it has been a disaster long-term hold unless you doubled up in 2009.

My issue is that the company’s debt does just not go down. The aforementioned €5 billion of free cash is actually ok when you look at it from a free cash flow yield basis and it will cover the c. 5.5% dividend yield this year. But that’s all the company will do. Net debt edged up as wireless spectrum payments and foreign exchange issues manifested themselves.  In short you are going to get your income…and not much more.

As regular readers of my musings will attest, I am no fan of large index-weight long-term holds. I do understand the rules of compounding, the power of dividends, the lowered risk but honestly whilst elephants can gallop, they tend to not do so forever. And when I see a portfolio loaded up with a bunch of ‘long-term holds’ I put my head in my hands. This is where Vodafone is today.

It may have shown today some better European growth numbers (due to easy comparisons) and it may have also been quite successful at cutting some costs, but it is simply not broad enough a group to compete in the modern TMT world. Even turgid BT Group (BT.A) with its EE mobile purchase has a better forward plan and wily old Rupert Murdoch is currently trying to buy the part of Sky (SKY) he does not already own to create a group which will sell us pay TV, broadband and any phones we would like.

In short – unless you are a yield muncher of unbending taste – exit stage left from Vodafone into the bounce today and reinvest elsewhere.

Chris Bailey is the editor of Financial Orbit


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