Vodafone shares hit five-year high
Vodafone shares were riding high today after investors kept faith in the mobile phone giant’s strategy for coping with cut-throat competition.
The stock lifted to a five-year record as chief executive Arun Sarin said annual results highlighted further progress in the company’s fight for new revenue streams in Europe and stronger growth in emerging markets.
Vodafone underlined the upbeat mood by increasing its dividend payout by 11%, which was more than expected and amounted to a total payout of £3.6 billion.
The group made adjusted pre-tax profits of £8.75 billion in the year to March 31, down 0.5% on a year earlier, although bottom-line losses narrowed to £2.38 billion. Underlying earnings, which reflect the performance of the business at an operating level, edged ahead 1.6% to £11.96 billion.
Analysts appeared content with the performance, even though worries remain about the company’s prospects in a competitive European market.
Richard Hunter, head of UK equities at Hargreaves Lansdown stockbrokers, said: “There is no doubting the size of the task ahead for Vodafone, but for the moment very steady progress is being made. The competitiveness and saturation of developed European markets has meant that Vodafone has looked further afield.”
Revenues in the UK rose 1.5% to £5.12 billion, but weaker profit margins meant earnings in the region fell 10.1% to £1.46 billion in the year. The same rate of decline was seen in Germany – Vodafone’s biggest market – as revenues dipped 5.4% to £5.44 billion and earnings stood at £2.43 billion.
The marketplace has become more competitive following the introduction of flexible contracts by competitors and the launch of VoIP services such as Skype, which enables telephone calls to be made over the internet.
The fall in UK margins during the year – down to 28.5% from 32.2% in 2006 - reflected Vodafone’s bid to retain customers by reducing tariffs but keeping acquisition and retention costs, the level of subsidy paid by Vodafone on its handsets, high.
In a bid to tackle the pressure, Mr Sarin has offered customers broadband and landline services alongside mobile phones.
The Newbury-based company launched its Vodafone At Home service in January offering unlimited broadband and inclusive calls to any UK landline, using BT Wholesale’s broadband network.
In Europe, new legislation restricting roaming call charges is set to make life more difficult for operators.
Vodafone claims that 75% of its roaming revenues will be unaffected by the law and says its charges have already fallen by 40% in the past two years.
Despite the saturated European market, Vodafone now has around 206 million customers worldwide and the company employs more than 60,000 staff, of which more than 10,000 are based in the UK.
The main driver of earnings growth has been emerging markets. In February the mobile phone group won the battle for control of India’s Hutchison Essar, although the deal had little impact on this year’s results.
Vodafone won a takeover tussle with Reliance Communications and Essar itself to buy Hutchison’s controlling stake for $11.1bn, reckoned to be the single largest foreign investment in India’s history.
Among existing operations, Vodafone said the last financial year saw revenues growth of 41% in Egypt, 28% in Romania and 22% in South Africa.
As expected, Vodafone wrote down the value of its German business in today’s results. However, it also took a further hit of £3.5 billion to cover the impact of legislation cancelling fixed fees on the top up of prepaid cards in Italy.
The total write-down of £11.6 billion seen in today’s results was still better than the £23.51 billion taken by the company a year earlier.
