1516 Wednesday 9 January 2019

Telcoms giant, Vodafone, received a double downgrade from RBC yesterday as they placed an ‘underperform’ recommendation on the firm. Whilst one of the concerns that lead to the downgrade stemmed from an uncertainty surrounding the costs of 5G, much of it revolved what they described as an ‘unsustainable’ dividend.

Many long term investors have held their Vodafone stock through thick and thin because its dividend has increased year on year since 2006. Although nothing is set in stone in the stock market, investors can get used to certain trends until they buck, and when that happens, several options are on the table. Since RBC’s downgrade of Vodafone, the stock has ticked downwards and is currently over 3% down on the news. But perhaps this is an overreaction to what is, at this point at least, speculation.

 It is true that the costs of 5G are yet to be fully understood, but to an equal point, neither are the profits. Vodafone has spent heavily in preparation, including many M&A dealings, in order to place themselves in prime position to win contracts and benefit from solid infrastructure. It is also worth noting that 5G is not the only card up their sleeves in 2019. Gigafast broadband internet will be rolled out across the UK this year bringing in new retail and business revenue plus upgrading of current plans.

A second point worth noting is the red flag raised to the dividend cut. Firstly, to clarify, the warning relates to possible dividends in 2020 and/or beyond and this year’s dividend shows no sign of being negatively touched. Secondly, as alluded to previously, no investor would like to see a cut in their dividend, especially as they have seen it increase every year, but the current yield of 8.7% is still attractive in this market.

In closing, we will have to see the costs/profits that 5G brings Vodafone, but the drop in value over the last 48 hours could be an overreaction and the 3% could be recouped once the negativity of the downgrade subsides.

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