On Monday, Vodafone (LSE:VOD) announced that chief executive Nick Read will leave the company at the end of the month.
News of his abrupt departure came less than three weeks after the group published its half-year results.
Vodafone’s share price has been on the slide for most of the year. And, as the price has fallen, the dividend yield has correspondingly risen. It’s 8.4%, as I’m writing.
Has Vodafone become a compelling value stock or is it one to avoid with a bargepole?
Underperformance
Vodafone’s shares are down around 20% this year, but have performed disappointingly for considerably longer.
They’ve lost over 40% of their value since the start of Read’s four-year tenure as CEO. This is a huge underperformance against both the FTSE 100, which is up 3%, and sector peers of the European STOXX telecom index (down a relatively modest 15%).
Underwhelming
The company’s financial performance has also been underwhelming.
In the year prior to Read taking the helm, the group generated revenue of €46.6bn, adjusted earnings per share of 11.59c and paid a 15.07c dividend. For the latest year, the respective numbers were €45.6bn, 11.03c and 9c.
Net debt over the period ballooned from €31.5bn to €41.6bn. And the recent half-year results showed a further rise to €45.5bn.
Messed-up M&A
The rise in debt reflects Read’s attempts to ignite growth through consolidation in Vodafone’s major markets with merger and acquisition (M&A) activity.
The acquisition of Liberty Global’s Germany division, and further activity in what is Europe’s largest market, isn’t currently looking like it’s paid off. A possible merger with MasMovil in Spain came to naught, with France’s Orange doing a deal and stealing a march on Vodafone in consolidating the Spanish market.
Read has also overseen the sale of Vodafone’s Hungarian business, the rejection of an offer for its Italian business, and the spin-off and partial sale of its Vantage Towers infrastructure arm. Meanwhile, a mooted deal to merge its UK business with rival Three UK has yet to materialise.
What does all this amount to? According to a recent analysis by Bloomberg columnist Chris Hughes: “Vodafone is an MBA case study of messed-up M&A.”
Activists
Hughes is on the same page as activist shareholders, who have been on Vodafone’s back for some time. We’ve heard criticism about boardroom personnel, the growth strategy, the complex and sprawling empire, and the declining share price.
The market’s response to the recent results — the share price dropped 8% on the day — appears to have spurred the board into taking some action.
Guidance downgrade
The results showed a deterioration in Vodafone’s major European markets. The performance in the biggest — Germany (around 30% of group revenue) — was particularly disappointing. The business lost customers and profits fell.
On the back of the weak first-half performance, Vodafone downgraded its guidance for the group’s full-year outlook. It brought down the top end of its adjusted earnings range of €15bn-€15.5bn to €15.2bn, and cut its adjusted free cash flow guidance from €5.3bn to €5.1bn.
In the face of high energy costs and rising inflation, management warned of price hikes and job losses, saying it’s targeting cost savings of €1bn+.
Where next?
In announcing that “Nick Read has agreed with the board that he will step down,” Vodafone signalled no change of business plan. Interim replacement, group chief financial officer Margherita Della Valle, has been tasked with simply “accelerat[ing] the execution of the company’s strategy.”
Della Valle is likely to be seen as a continuity candidate for the permanent position by investors who want anything other than more of the same. However, the company is also considering external candidates.
Some analysts have asked what any new CEO — internal or external — could really do differently. I think activist investors would say that a radical overhaul or break-up of the group would unlock value for investors.
Aviva CEO Amanda Blanc achieved such a result with admirable speed and aplomb following her appointment in July 2020.
In the balance
Is Vodafone a compelling value stock or one to avoid with a bargepole? It’s not an easy question to answer, but I do think the 8.4% dividend yield may not be a reliable indicator of value.
The company’s debt level is uncomfortable, despite the Vantage Towers transaction, and with the current weak business performance and announcement of the CEO’s departure, I agree with analysts at Jefferies, who commented: “We think dividend policy should be treated as under review.”
The post What next for Vodafone shares after CEO departs? appeared first on The Motley Fool UK.
5 stocks for trying to build wealth after 50
Markets around the world are reeling from the current situation in Ukraine… and with so many great companies trading at what look to be “discount-bin” prices, now could be the time for savvy investors to snap up some potential bargains.
But whether you’re a newbie investor or a seasoned pro, deciding which stocks to add to your shopping list can be a daunting prospect during such unprecedented times.
Fortunately, The Motley Fool UK analyst team have short-listed five companies that they believe STILL boast significant long-term growth prospects despite the global upheaval…
We’re sharing the names in a special FREE investing report that you can download today. We believe these stocks could be a great fit for any well-diversified portfolio with the goal of building wealth in your 50’s.
Claim your free copy now
setButtonColorDefaults(“#5FA85D”, ‘background’, ‘#5FA85D’);
setButtonColorDefaults(“#43A24A”, ‘border-color’, ‘#43A24A’);
setButtonColorDefaults(“#FFFFFF”, ‘color’, ‘#FFFFFF’);
})()
More reading
Is it finally time to give up on Vodafone shares for good?
If I’d invested £500 in Vodafone shares 3 years ago, here’s how much I’d have now!
The Vodafone share price is just pennies — should I make a move?
8%+ dividend yields! 3 FTSE 100 shares I’d snap up
Should I buy Vodafone shares for the huge dividend yield?
Graham has no position in any of the shares mentioned in this article. The Motley Fool UK has recommended Vodafone Group Public. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.