Not that long ago Vodafone shares were the darling of the FTSE 100 and a world leader in mobile telephony. But their shares have been in steady decline for the last five years. So, what is causing the drop in the share price and what needs to happen for it to go up?
In February 2000 Vodafone acquired the German conglomerate Mannesman, in a deal valued at $190 billion, then the largest takeover in history.
However, it’s been largely downhill for the company ever since, with the Vodafone stock price falling by -57.60% over the last 20 years.
The current market cap of the Vodafone Group Plc is £17.70 billion just a fraction of the value of that Mannesman takeover deal.
No growth, no profit
So why has the market fallen out of love with Vodafone?
Vodafone started life as a growth stock and at one point it was one of the world’s largest mobile phone companies, even today its annual revenues exceed €40.0 billion.
However, despite that significant turnover, it struggles to” turn a profit”, racking up a €155.0 million loss in the first half of the financial year 2024 for example.
Vodafone has been trying to find the right mix of businesses and locations for much of the last twenty years.
Today it has more than 18 million UK customers, and globally, it has operations in Europe, where it has deployed 5G networks in 346 cities, and across Africa where it has just under 95.00 million mobile customers.
No longer attractive
The provision of mobile telecom services was once an attractive business, but more recently it has become increasingly commoditised, and at the same time ever more capital-intensive.
It has been phone manufacturers, app and software creators, rather than mobile carriers like Vodafone that have most benefited from the emergence of smartphones, and the always-on economy.
More investment but lower returns
If anything Vodafone and its peers have been forced to invest ever more money into the next generation of cellular networks just to keep up.
Something that’s prompted collaboration and ultimately M&A between major players. BT recently took over EE and Vodafone is pursuing a merger with rival network Three. The latter deal is undergoing regulatory scrutiny.
However, as Three’s CTO, David Hennessy told the UK Competition and Markets Authority recently:
“Neither us nor Vodafone can invest sufficiently (individually) to build the type of 5G network that’s needed,”
Attempts to diversify
Vodafone has tried to diversify by offering home and business broadband but once again this is an incredibly competitive sector, and in the last week Talk Talk has warned of material uncertainty ahead for its business.
Vodafone has also tried to realise shareholder value in recent years through disposals and by spinning off parts of the business. For example, Vantage Towers, that owns and operates cellular masts in Europe.
More recently Vodafone has sold down its stake in Vantage Towers, which is now managed by a joint venture between Vodafone and PE firms KKR and GIP.
An attractive dividend yield but it’s unlikely to be sustainable.
Vodafone’s dividend yield currently stands at 11.67% making it the highest-yielding stock in the FTSE.
That might sound attractive, and on the face of it is until you realise that Vodafone’s dividend payout ratio is 102%.
This tells us that the firm is dipping into its reserves to pay the dividend, what’s more, the dividend has fallen by more than -9.0% over the last 5 years.
Can anything change Vodafone’s fortunes?
If it’s approved, the merger with Three may provide some much-needed economies of scale for the UK business, and whilst inflation is still alive in the UK the company will be able to roll out meaningful, yet regulated price rises, for its services.
The prospect of lower interest rates and energy prices could ease the cost of the firm’s debt burden and operating costs.
However, it’s hard to see a return to the glory days and it is far more likely that any improvements in the share price, will come about as a result of efficient balance sheet management and modest increases in margins and subscriber numbers, where possible.
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