Shares in Vodafone (LSE: VOD) have not had a great few months. The Vodafone share price is 12% below where it began the year – and half of what it was five years ago.
The shares have a dividend yield of 10.4%, which suggests to me that many investors may doubt how likely the shareholder payout is to be maintained.
But I see value here and think the latest development at the company could help boost the share price in coming months.
Spanish sale agreed
Today (31 October), the company announced it has entered into binding agreements to sell Vodafone Spain. It is set to receive at least €4.1bn in cash and could get up to €0.9bn in redeemable preference shares.
At surface level, retreating from a major European market might not look like a step in the right direction.
But I see it as positive for Vodafone shares for two reasons.
First, by concentrating on where it has the biggest scale and opportunity, I think Vodafone could improve its total business performance. Secondly, the cash could come in handy as a way to support the dividend, pay down some debt, or both.
Long-term dividend potential
The Vodafone dividend has long looked at risk of a cut due to lacklustre business performance and high debt load. Since the most recent cut in 2019, it has been flat.
Selling off the Spanish business will likely reduce earnings meaningfully. Longer term, that may not seem ideal, although it does at least help free up the company to focus on its biggest opportunities and key markets. Increased competition and inflationary pressures in the Spanish market have affected Vodafone’s business performance there in the past few years.
In the short term, I think the cash injection could come in handy.
In a high interest rate environment, I think it makes sense for the company to keep reducing its debt pile. Net debt in the company’s most recent financial year fell around a fifth, but still stood at €33bn.
I also reckon the cash could ease pressure on the company to cut its dividend.
Share price outlook
The market greeted the news coolly, with Vodafone shares opening slightly down in morning trading.
Over the longer term though, I think the move could help boost the share price. It shows the company continues to move decisively to reshape itself. I reckon a smaller, less indebted and more focused Vodafone could merit a higher valuation than the company currently has.
Keeping the dividend at its current level could also help boost the share price in my view.
The statement about the Spanish sales made no mention of this. It may be the case that Vodafone losing its Spanish earnings justified a dividend cut.
But I also think the cash injection buys a cushion of time during which management can seek to improve overall business performance. If that happens, and debt keeps falling, there could be a firmer financial basis to maintain the dividend than before.
For now, I have no plans to sell my Vodafone shares.
The post Could this news trigger Vodafone shares to move up in price? appeared first on The Motley Fool UK.
Don’t miss this top growth pick for the ‘cost of living crisis’
While the media raves about Google and Amazon, this lesser-known stock has quietly grown 880% – with a:
Greater than 20X increase in margins
Nearly 60% compounded revenue growth over 5 years – more than Apple, Amazon and Google!
A 3,000% earnings explosion
Of course, past performance is no guarantee of future results. However, we think it’s stronger now than ever before. Amazingly, you may never have heard of this company.
Yet there’s a 1-in-3 chance you’ve used one of its 250 brands. Many are household names with millions of monthly website visitors, and that often help consumers compare items, shop around and save.
Now, as the ‘cost of living crisis’ bites, we believe its influence could soar. And that might bring imminent new gains to investors who’re in position today. So please, don’t leave without your FREE report, ‘One Top Growth Stock from The Motley Fool’.
Claim your FREE copy now
setButtonColorDefaults(“#5FA85D”, ‘background’, ‘#5FA85D’);
setButtonColorDefaults(“#43A24A”, ‘border-color’, ‘#43A24A’);
setButtonColorDefaults(“#fff”, ‘color’, ‘#FFFFFF’);
})()
More reading
3 ‘nightmare’ FTSE 100 value traps I wouldn’t buy with free money
Up, down or flat? The Vodafone dividend forecast has got me thinking
3 shares to buy in November for 10%+ dividends
4 reasons I think Vodafone is one of the best FTSE 100 stocks to consider buying!
Will dividends be cut at these battered FTSE 100 shares?
C Ruane has positions in Vodafone Group Public. 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.
