Is progress fast enough to keep investors happy with dividend halved from next year?
Vodafone Group reported its annual results broadly in line with expectations, posting core earnings of €11.02 billion from revenues of €36.7 billion. The group’s service revenue dropped 1.3 percent, but on an organic basis, increased by 6.3%, with opcos in Europe and Africa, and its Business division all growing. With the exception of Turkey, the Group had service revenue growth of 3.7% (to €29.9 billion) on an organic basis.
Vodafone’s operating profit decreased by 74.6% to €3.7 billion, but the fall was largely due to business disposals over the 2023 financial year, most notably, the €8.6 billion it gained from divesting Vantage Towers.
Undervalued?
Shares in Vodafone have fallen 22% in the last 12 months and by 44% since 2019. It only rose slightly after the earnings announcement, propelled by the promise of a €2 billion share buyback by the company. Vodafone said it would pay ¢9 dividend per share for 2024, but would halve this going forward to invest in its networks.
Net debt, not taking into account the sales of opcos in Spain and Italy, remained flat at €33.2 billion.
James Beard at the Motley Fool makes an interesting case for why the share price should be 87% higher here. He also writes, “With regards to profitability, selling Spain and Italy is likely to improve the company’s ROCE [return on capital employed] by ‘at least’ one percentage point. This might not sound very much. But in FY23 it would have been worth another €1.1bn (7.7%) of operating profit.”
Good news and bad
Top-line growth in the final quarter was boosted by gains in Germany – its biggest European market – and the UK. Over the year, Vodafone’s service revenues from Germany grew by 0.2% but accelerated to achieve 0.6% in the fourth quarter. However, adjusted core earnings fell 5.8% due to higher energy costs and other inflationary factors.
It is also braced to lose 4 million customers in Germany, at an estimated cost of €400 million, when a regulatory change comes into force in July. Until now, people in multi-tenancy buildings had to accept the TV and broadband service provider their chosen by the owner. Now each unit within the building will have the right to choose their own.
Vodafone acquired about 8.5 million customers within multi-tenancy buildings when it bought Liberty Global’s German operating company, along with those in the Czech Republic, Hungary and Romania for €18.4 billion in August 2019.
Della Valle said that business in Germany was expected to improve and by 2026 “will come back to being an important growth engine for the group”.
The UK remains a strong market for Vodafone, but the question of whether the £15 billion (€17.44 billion) proposed joint venture with Three UK is allowed to proceed hangs in the balance. In the last financial year, mobile service revenues rose 5.4%, boosted by double-digit price hikes.
A better place?
Vodafone seems to be in a better place than it was a year ago when it reported earnings of €14.9 billion and the CEO laid out her recovery plan.
Della Valle said in a statement, “A year ago, I set out my plans to transform Vodafone, including the need to right-size Europe for growth. Since then, we have announced a series of transactions and we are now delivering growth in all of our markets across Europe and Africa.
“We performed slightly ahead of expectations in the financial year, with good organic service revenue growth of 6.3% and organic EBITDAaL [earnings before interest, taxes, depreciation, amortisation, and adjusted loss] of 2.2%.
“Our Business division – a key growth driver – achieved 5.4% revenue growth in the fourth quarter. Much more still needs to be done in the year ahead. We will step-up investment in our customer experience, improve our underlying performance in Germany and accelerate our momentum in Business, whilst also continuing to simplify our operations thshare
roughout the group. We are fundamentally transforming Vodafone for growth.”
Focus on customer service
Vodafone said it is working to transform customer experience, having reallocated €140 million in new incentives and plans to develop talent. It has started processing customer insights using real-time AI models, feeding into detailed action plans on a weekly basis in all markets.
Vodafone says frontline tools and improved processes have benefited 70,000 team members, although it also reduced headcount by 5,000 in line with the three-year recovery plan announced by Della Valle at the annual earnings announcement last year. Another 2,000 jobs are due to follow, to reach an overall target of shedding 11,000 jobs by 2026 and cutting operating costs by €1 billion.
Vodafone’s recovery plan appears to be progressing. Whether it will ultimately succeed remains to be seen.