StockBeat: Vodafone Bows to the Inevitable Costs of 5G

© Reuters.

By Geoffrey Smith

Investing.com -- The cost of preparing for 5G has finally caught up with Vodafone (LON:VOD).

The U.K. telecoms giant has finally admitted it can’t afford its 4 billion euro dividend and is cutting its payout for the first time in nearly 30 years, only months after incoming chief executive Nick Read vowed to protect it

It’s a serious blow to pension managers and other income-hunters, but not an unexpected one, in the light of a 6.6 billion-pound loss in the last fiscal year. The company’s shares have been trading at a dividend yield of over 9% in recent weeks, suggesting that a fair amount of speculation on a dividend cut was already baked in.

The stock was up slightly on Tuesday, in line with a modest bounce in European markets after Monday’s trade-war-induced volatility. At 4:30 AM ET (0830 GMT), it was up 2.3%, outperforming the U.K. FTSE 100, which was up 0.7%. The benchmark Euro Stoxx 600 was up 0.4% at 373.94 points, still down 2% over the last week.

With 30 billion euros in net debt and the cost of paying for 5G spectrum still largely to come, the company has been looking financially weak for some time. Operational stumbles in Spain and Italy haven’t helped, and the acquisition of Liberty Global’s German assets, which ought to give it a big boost in pricing power in Europe’s biggest market, still isn’t expected to close until July.

Until those assets can start throwing out cash, Vodafone is resorting to other ways of raising or saving money. Overnight, it announced it will sell its New Zealand business to a consortium led by Brookfield for $2.2 billion. It isn’t too much of a stretch to see its Australian business going the same way, after regulators thwarted its best hope of success there last week by ruling against its proposed merger with TPG.

Closer to home, it has signed agreements to share infrastructure with other operators already in place. Once those agreements are in place, Vodafone says it will look at monetizing its towers business – an area that has generated some eye-catchingly high M&A deals elsewhere in Europe recently.

For investors, the stock still yields a respectable 5.77% and Read on Tuesday promised a “progressive” dividend policy in future, aiming to rebuild the payout once debt is down toward 2.5 times EBITDA.