Vodafone's Cash-Flow Pledge Eases Concerns Over Dividend

  • Carrier says it will generate $5.5 billion this fiscal year
  • Organic service revenue increases 1.5% in fourth quarter

Vodafone Group Plc promised to milk more of the cash that flows through the world’s second-largest mobile-phone operation and funnel it back to shareholders after years of investment and expansion.

The stock rose the most in 10 months on Tuesday after the Newbury, England-based carrier forecast a 23 percent increase in free cash flow to 5 billion euros ($5.5 billion) this year and continued growth of its dividend.

Vittorio Colao

Photographer: Antonio Heredia/Bloomberg

The pledge eases concerns about the dividend’s sustainability, after some analysts had raised the prospect of a cut. Chief Executive Officer Vittorio Colao is reining in costs, making deals to boost profit and slowing the pace of network investments, leaving him enough cash to acquire wireless frequencies while still boosting the payout to investors.

“We are getting into a space where we see a balance between our investment needs,” rewarding shareholders and paying for spectrum, Colao said on a call with reporters. “The broad direction is that these three things are becoming compatible.”

Colao has been reshaping Vodafone with joint ventures to maximize profit and fight competition in markets like India, where losses pushed the company to join forces with Idea Cellular Ltd. in March. The carrier is vying with better-integrated rivals, leading to speculation it will be drawn into more deals, particularly in Europe.  

Vodafone gave the free cash flow forecast, which excludes mergers and acquisitions, spectrum and restructuring costs, while releasing fourth-quarter results that met analysts’ estimates. Writedowns in India dragged the company to a loss of 6.1 billion euros for the year ended March 31. The company said it delivered total annual dividends of 14.77 euro cents a share, up 2 percent, and said it plans more increases.

Free cash flow after spectrum costs “should cover the dividend in fiscal 2018 for the first time in years,” analysts at Goldman Sachs wrote in a research note. “We expect improved confidence from today’s results.”

The company’s stock advanced as much as 4.4 percent, on track for its biggest gain since July 2016. The shares were up 3.8 percent to 219.15 pence at 10:07 a.m. in London, bringing the year-to-date gain to 9.7 percent.

Liberty Global

A Dutch joint venture with Liberty Global Plc and moves by Vodafone to tidy up emerging-markets businesses including in Africa are spurring optimism for more deals between the two companies in the U.K. and Germany, or on a bigger scale. A broader tie-up with Liberty remains Vodafone’s best option, amid the threat of a revenue slowdown from rising European competition, Stephane Beyazian, an analyst at Raymond James, said in a note.

For more on the courtship between Vodafone’s Colao and Malone, click here

Vodafone reported fourth-quarter organic service revenue growth of 1.5 percent, matching the average forecast of five analysts. Organic service revenue, the money the company gets from customers’ plans and traffic on its networks excluding handset sales, notably grew in Egypt and Spain while deteriorating in the U.K., where it’s still recovering from customer losses over challenges bringing in a new billing system.

“Basic operational elements of the U.K. are essentially towards resolution and now we are again refocusing on commercial competitiveness,” Colao said. The numbers should improve in the second half of the year, he said.

— With assistance by Kasper Viita

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