Vodafone share price tumbles on dividend cut report

Share price in Vodafone has taken a 4.3% hit during the opening hours of trading as rumours over a cut in dividend emerge.

Although several telcos have veered away from the dangers of cutting a dividend, The Sunday Times is reporting Vodafone is on the verge of making the announcement. With fourth quarter results scheduled for tomorrow morning, the team only has a short period of time to fend off unwanted questions.

Vodafone is currently one of the most attractive investments in the FTSE thanks to higher than average dividend payments to investors, though that might all be about to change. Some analyst firms are suggesting the cut could be as large as 50%, taking the dividend down from 15 pence per share to 7.5 pence. At the time of writing, Vodafone’s share price had declined 4.53% from the closing price on Friday afternoon.

The Vodafone share price has been steadily declining over the last 12-18 months, though any more downward movement could take it to the lowest since the fallout of the financial crisis in 2008.

The cause of the dividend cut is most likely to be due to the demands of 5G deployments across Europe. Although Vodafone is in a very strong position in multiple markets across the continent, this creates a difficult position when it comes to funding the funds to fuel future-proof infrastructure investments.

The challenge which Vodafone is specifically facing is spectrum. With auctions in Italy and Germany set to push the price of spectrum further north, telcos in the markets will be scrapping and scraping to secure a war chest deep enough.

It might not be the most exciting part of the mobile connectivity segment, but spectrum is one of the most critical. The assets could potentially define the success of a telco in the future 5G world, and numerous executives have already bemoaned the process of securing the frequencies. Some are complaining of the scarcity, and others of the price. Spectrum is central to 5G plans, and it’s not cheap.

This current predicament has been predicted however. Back in January, RBC Capital Markets suggested Vodafone might be in a precarious position due to years of restructuring, M&A, as well as exposure in up-coming spectrum auctions.

“Its underlying markets remain ‘challenging’ and it has very little financial headroom despite synergies and cost cutting,” the investor note stated. “Vodafone has options with its towers but faces a threat from 5G spectrum. The dividend is unsustainable even before we consider a macro downturn.”

RBC estimated securing the relevant licences could cost Vodafone between €4.5 billion and €12 billion, and even suggested investors should sell Vodafone shares ahead of a potential dip.

These are of course rumours for the moment, though there is enough support to justify the dip in share price. Only tomorrow’s results will tell.

Vodafone Shareprice

Nokia shares down as it misses profit expectations

Kit vendor Nokia reported quarterly operating profit 42 percent lower than a year ago in Q2 2018 but reiterated its whole year target, pinning hopes on aggressive 5G rollout.

When the headline of the result release reads “First half 2018 as expected”, it is a sign that there is not much to write home about. Nokia reported quarterly net sales of €5.3 billion, 6 percent down from Q2 2017, while the operating profit, in non-IFRS measures, went down by 42 percent to €334 million, falling short of analyst mean forecast of €373 million. It would have been a €221 million operating loss if the costs related to the Alcatel-Lucent acquisition, goodwill impairment charges, intangible asset amortization, etc, were included. Share price fell by more than 7 percent by the time of writing, having recovered from a 9 percent drop earlier.

“Business and regional mix continued to have some impact on gross margin,” said Nokia CEO Rajeev Suri. The main year-on-year drops in its Networks business took place in Asia Pacific and Greater China. But Nokia maintained that it is still on track to achieve its full year targets, believing the rollout of 5G in key markets would come to the rescue. “Our view about the acceleration of 5G has not changed and we continue to believe that Nokia is well-positioned for the coming technology cycle given the strength of our end-to-end portfolio. Our deal win rate is very good, with significant recent successes in the key early 5G markets of the United States and China,” said Suri.

Nokia may be right that 5G is going to start to be rolled out in the US and in Asia later this year, but its success is not guaranteed. Although the Chinese vendors Huawei and ZTE, formidable competitors globally, have had their fortunes curtailed in the US market, Nokia is facing stiff competition from its northern European rival Ericsson. Nokia’s strategy to attack selected verticals in 5G is a smart move, to diversify its client base to go beyond telecom operators.

Another Nokia strategy to bear fruit is its high investment in R&D over the years. One bright point that stood out in the release was Nokia Technologies, the unit tasked to license Nokia’s IPR and brand. With less than 7 percent of the total net sales, it generated over 87 percent of the company’s operating profit, up by 27 percent over Q2 2017. You can read further analysis of Nokia’s numbers at Light Reading here, and here are they are in a table.

Nokia Q2 2018 table