In the five years since quitting the American market, Vodafone has struggled to form a coherent whole from its disparate parts. Back then, investors had much to celebrate. Vittorio Colao, now its ex-boss, was poised to hand more than £50 billion to shareholders after selling its 45 per cent stake in America’s largest mobile phone network. According to the Italian, the future was bright; the remainder of the near-£80 billion Verizon Wireless proceeds were used to trim debt and invest in cable broadband.
Mr Colao’s successor could be forgiven for ruing such generosity. Nick Read, a former chief financial officer who took the reins in October, must wish that the company had paid off more debt when it had the chance. Right now, he’s battling to balance the interests of his investors and the credit ratings agencies.
Vodafone is in the throes of acquiring an €18 billion cable broadband business in Germany and eastern Europe from Liberty Global, the owner of Virgin Media. The deal was one Vodafone could not afford to spurn as Germany is its largest market, but the acquisition will significantly increase its €32 billion debt.
In his first outing as chief executive in November, Mr Read promised to slash costs by eradicating inefficiencies, sweating infrastructure assets and “driving greater consistency of commercial execution”. A trading update the week after next will shed some light on all that and on Voda’s troubled Italian and Spanish operations.
Of far greater concern to investors will be any clues that Mr Read lets slip on cash returns. Vodafone shareholders prize their dividend above all else, but the total dividend of 15.07 euro cents, which equates to a 9 per cent yield, suggests that they are braced for a sharp cut. Some analysts predict that Mr Read could drop the axe as soon as May, when he delivers full-year results.
The 53-year-old knows Vodafone inside out, having worked for the company since 2001. He has been assiduously groomed for the top job. And he knows better than anyone that running Vodafone can feel like a game of whack-a-mole; as soon as one problem is resolved, another rears its head, usually in a far-flung location where it is least expected. Vodafone’s empire has spread to 25 countries and more than 500 million users since it was founded in Newbury, Berkshire, in 1982. Despite losing a third of its value since the start of last year, it remains one of the largest companies in the FTSE 100 with a market value of £40 billion.
Mr Read’s main task is not hidden out of sight. After the Liberty deal is completed, Vodafone’s debt levels will jump to 3.8 times adjusted underlying earnings. Moody’s has put Vodafone on watch for a possible downgrade to a level just two notches above junk status. Given its relatively high debt levels, Mr Read would be expected to sacrifice some of the dividend payout if there were a risk of Vodafone losing its investment grade rating.
Citigroup and Numis published “buy” notes on Vodafone yesterday, with the latter placing a 220p price target on the shares. Vodafone fell by ½p, or 0.4 per cent, to 148¾p. However, Guy Peddy, at MacQuarie, warned of a dividend cut. He said that life could get much harder for Vodafone in Germany, which will account for 31 per cent of its underlying profits after the Liberty Global deal. Regulators are pushing operators to raise the quality of services for road and rail travellers, which will require extra investment, and Mr Peddy also fears that the cable network Vodafone is buying could be “entering its twilight years”, with Deutsche Telekom rolling out a superior fibre-optic rival.
With costly spectrum auctions and 5G upgrades looming, it is hard to see Vodafone maintaining its gravity-defying dividend.
ADVICE Avoid
WHY A dividend cut is a real possibility
Gym Group
Forget Veganuary. To judge by the numbers turning to treadmills and spin classes to reverse the festive excesses, this month more accurately could be dubbed Gymanuary (Dominic Walsh writes).
The Gym Group, the second biggest low-cost operator after Pure Gym, said yesterday that it had passed the 750,000 members milestone, up from 724,000 at the end of last month, not bad for a company that signed its first member in 2008.
Yet the shares are now trading below where they were a year ago after tumbling by 17½p to 207½p last night, down almost 8 per cent after the group trimmed its guidance for adjusted 2018 underlying earnings from £38.8 million to £37 million.
In truth, there is little to worry shareholders in yesterday’s trading update. During the year, the company opened 17 new clubs and acquired 13 sites from Easygym, lifting its total to 158, so doubling in size over the past three years. The retail malaise has enabled it to snap up former BHS and Carpetright sites, for example, and it continues to anticipate between 15 and 20 new gyms this year.
The only real issue was an opening programme “more weighted towards the end of the year than originally planned and this has resulted in fewer trading weeks than expected in the second half”. As a result it opened five clubs in December that contributed little to 2018 results.
To boost returns, Gym Group has completed the roll-out of Live It, a premium membership that provides multiple gym access and discounts and offers for an extra £4.99 a month on top of the normal subcription of between £12.99 and £29.99. The impact on 2018 figures will be modest, but with almost 12 per cent of members now subscribing to it, it promises to become more material.
The other big change has been the trial of a new operating model for its personal trainers, which the company believes will improve customer satisfaction. At present, trainers pay the company rent to sell their services to members; the new system means that they work 12 hours a week for the group at the minimum wage and to ensure that trainers are not financially worse off, their rent will be reduced, costing the group £1 million a year.
ADVICE Buy
WHY No signs that it’s running out of puff