Image source: Vodafone Group plc
Actions in Vodafone (LSE: VOD) have not had a good few months. Vodafone’s share price is 12% below where it started the year, and half what it was five years ago.
The stock has a dividend yield of 10.4%, which suggests to me that many investors may doubt the likelihood of the payout to shareholders being sustained.
But I see value here and think the latest development in the company could help boost the share price in the coming months.
Spanish sale agreed
Today (October 31), the company announced that it has signed binding agreements to sell Vodafone Spain. It is expected to receive at least €4.1 billion in cash and could get up to €900 million in redeemable preferred shares.
On the surface, withdrawing from a major European market might not seem like a step in the right direction.
But I see it as positive for Vodafone shares for two reasons.
Firstly, by focusing on those places where it has greater scale and opportunity, I believe Vodafone could improve its overall business performance. Second, cash could be useful as a way to support the dividend, pay down some debt, or both.
Long-term dividend potential
Vodafone’s dividend has long been considered at risk of being cut due to lackluster business performance and high debt load. Since the most recent cut in 2019, it has remained stable.
The sale of the Spanish business will likely reduce profits significantly. In the long term, this may not seem ideal, although it at least helps 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 recent years.
In the short term, I think the cash injection could help.
In a high interest rate environment, I think it makes sense for the company to continue reducing its debt. Net debt in the company’s last financial year fell by around a fifth, but still stood at €33 billion.
I also think the cash could ease pressure on the company to cut its dividend.
Stock Price Outlook
The market received the news coolly and Vodafone shares opened slightly lower in morning trading.
However, in the long term I think the move could help boost the share price. It shows that the company continues to move forward decisively to remodel itself. I believe that a smaller, less indebted and more focused Vodafone could deserve a higher valuation than the company currently has.
In my opinion, keeping the dividend at its current level could also help boost the share price.
The statement on Spanish sales does not mention this. It may be the case that Vodafone’s loss of profits in Spain justifies a dividend cut.
But I also think the cash injection buys a cushion of time during which management can try to improve the overall performance of the business. If that happens and debt continues to fall, there could be a firmer financial basis than before to maintain the dividend.
For now I have no plans to sell my Vodafone shares.
