Third quarter results from the mobile network giant do show a tapering of organic growth, a worry for investors.
This is the chief reason why shares in Vodafone (VOD) are among the FTSE 100’s worst performing on Thursday, down 2.7% at 218.4p.
Only RELX (REL), the publisher and data provider formerly called Reed Elsevier, is doing worse among UK blue chips today, sliding a little more than 3%.
Vodafone’s update today shows organic service revenue growth of 1.1% for the three months to 31 December 2017. That’s mildly below the 1.3% rate of the second quarter, and half the 2.2% chalked-up in Q1.
UK, EUROPE’S SICK CHILD
This is largely because of declining performance in the UK. This part of the business continues to struggle in the face of stiff competitive pressures and an Enterprise unit dragging on modest Consumer arm improvements.
Organic service revenue in Britain declined 4.8% over the quarter, although it’s worth noting the 5.8% overall growth of UK revenues, thanks to tariff price increases.
As one analyst said today, the ‘UK remains the bad boy of Europe.’
To put this into context, every other geographic region in which Vodafone operates is delivering organic growth, bar Italy, which is a fraction off flat.
The UK represents about 14.7% of Vodafone’s total revenues, and about the same on service income. It’s important, but doesn’t necessarily dictate group performance.
STRENGTHENING INCOME STORY
Just as well, because investors largely buy Vodafone shares for the hefty dividends they are promised in future. After today’s share price decline the stock implies an income yield of 6.1%, based on an unchanged €0.154 per share payout forecast by Numis Securities.
Not for the first time that payout will not be covered by earnings, according to Numis, yet that imbalance should change in the coming years as the UK issues shrink versus better performances elsewhere.
By 2020 consensus estimates suggest earnings will roughly cover dividends.
There's also enormous cash flows that Vodafone generates, out of which dividends are paid.
Which should leave shareholders feeling more comfortable on Vodafone’s income credentials. That's the biggest reason Vodafone is one of Shares Great Ideas selections.
