Leila Abboud is a Bloomberg Gadfly columnist covering technology. She previously worked for Reuters and the Wall Street Journal.

Vodafone shareholders might want to hold off on the celebrations.

The British mobile phone behemoth is going to have to live with higher levels of capital expenditure than it's enjoyed historically, even after a two-year upgrade of its networks comes to an end. Customers are increasingly buying mobile and fixed-line services in bundles from a single provider, something Vodafone can't match in Britain, and rivals are ramping up spending on faster, fiber broadband networks.

Add to that a round of spectrum auctions, and the three threats could crimp promised dividend growth and a tentative recovery in Vodafone's valuation.

After posting its first growth in annual sales and Ebitda since 2010 this week, Vodafone predicted a rebound in cash generation. The company expects free cash flow to jump to 4 billion euros ($4.5 billion) this fiscal year, a big turnaround from the past two years, when the costs of the upgrade cut cash generation to roughly 1 billion pounds a year. Vodafone will also tie managers' bonuses to lifting operating cash flow by more than a third over the next three years.

CEO Vittorio Colao has been pouring money into Project Spring, a program that aims to improve its 4G and broadband services in Europe, Africa and India, and help Vodafone keep up with peers such as Telefonica and Deutsche Telekom.

Vodafone always insisted the 19 billion-pound ($28 billion) Project Spring would not turn into a Project Summer. But as the program ends, it now admits it needs to do more, especially in the U.K., where its largely mobile operation can't match the bundle packages offered by BT, Sky and Liberty Global's Virgin Media.

Vodafone said it capex-to-sales ratio will be in the "mid-teens" in the coming fiscal year because of higher spending on broadband. That compares with as much as 22 percent in 2014 and 2015 and 14 percent in 2012 and 2013.

Network Upgrade
Vodafone's Project Spring may be ending but network investments will remain higher than in the past
Source: Mirabaud Securities
2016 and 2017 are estimates based on Mirabaud analysis

For Vodafone to benefit from that investment, it needs to persuade more people to pay for mobile data. Only about 27 percent of its customers use 4G, a much smaller proportion than is common in the U.S. or Asia. And the convergence problem isn't going away: fixed and mobile bundles are nascent in the U.K., slowly taking hold in Germany, and already widespread in Spain.

The next round of spectrum auctions will probably drain even more cash. Vodafone will have to bid on mobile spectrum in Italy, Britain, India and Spain in the next few years. Telecoms operators usually count spectrum as a one-time cost but, as Mirabaud analyst Will Draper points out, that's the wrong approach. Spending on spectrum reduces cash flow, and money available for acquisitions, paying down debt -- or dividends.

Shareholder Rewards
Vodafone has long been a reliable dividend payer, but its scope to grow payouts is narrowing
Source: Bloomberg

That last element is where Vodafone is vulnerable. As Project Spring sapped cash flow, Vodafone has been borrowing to pay its dividend. This year's rebound in cash flow should mean even an increased dividend is covered, but only just. The company prides itself on being one of the few of Britain's biggest companies to increase dividends for the past decade. The payment will only increase 2 percent this year, and the room for future growth looks limited.

Outperforming Benchmark
Vodafone has outperformed its peers over the past 12 months
Source: Bloomberg

Vodafone is at a delicate moment. The stock has outperformed peers in the past year, but Colao still has to prove to his so-far patient shareholders that his huge investment on a better network will bear fruit.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Leila Abboud in Paris at

To contact the editor responsible for this story:
Edward Evans at