Vodafone's Potential Dividend Cut, Competition, Capital Needs Sideline Jefferies

Vodafone Group Plc VOD faces multiple challenges, according to Jefferies. 

The Analyst

Analyst Jerry Dellis downgraded Vodafone from Buy to Hold and lowered the price target on its London-listed shares.

The Thesis

Vodafone's acquisition of Liberty Global PLC Class A LBTYA's German/central Eastern European assets will increase its leverage to an extent that even a large dividend cut will not free up resources to invest more into projects that could enhance earnings growth organically, Dellis said in a Monday note. (See the analyst's track record here.)

A 40-percent dividend cut in fiscal 2019-2019  and then maintenance at that level is warranted in order to reduce leverage to 2.5 times by March 2023, the analyst said. 

Dellis said he does not view tower sales as a positive for the following three reasons:

• Replacing financial debt with ongoing service fee obligations will not alter significantly ratings agencies' assessments of Vodafone's leverage.
• Outsourcing towers does not create value.
• Allowing challenger rivals access to strategic sites may lead to potential loss.

"A more convincing option for VOD could be to pool towers (on a country-by-country basis) with other mobile providers who co-lead on network quality," Dellis said.

In Spain, Vodafone is squeezed between MasMovil's challenger single/dual-play pricing and TEF's success in lifting subs into triple-play, the analyst said. 

Dellis sees the company making a potential cash outlay of 5 billion euros in calendar 2019-2021 if it spends 40 euros/MHz/POP at the upcoming 700MHz 5G auctions, including Italy.

Jefferies said political support for 5G investment coudl turn the firm positive on the stock.

The Price Action

Vodafone's U.S.-trades shares were down 3.55 percent at $20.33 at the time of publication Monday.

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