How to trade Vodafone shares

1. What you need to know about Vodafone shares
2. How to trade Vodafone shares
3. Analysing Vodafone shares

Understanding Vodafone

Vodafone is one of the largest telecommunications companies in the world, operating mobile networks in 26 countries and fixed-line services, such as broadband, in 17 of them. Europe is the company’s stronghold, accounting for over three-quarters of all revenue. Germany is the company’s single-biggest market in terms of both revenue and earnings, partly thanks to the considerably higher margin it earns there compared to the likes of the UK and Spain:

Vodafone Europe breakdown

Vodafone is currently trying to expand in Europe by buying a string of assets from US firm Liberty Global, which you can read about here.

It also has a significant presence across Africa, the Middle East and Asia Pacific (AMAP), including Vodacom in South Africa and Vodafone India. However, the vast majority of its other operations are run under joint ventures with other telecoms companies, usually local incumbents. This includes the US, Canada, South America, Russia, Eastern Europe and some other central European nations such as France and Belgium.

A lot of attention is on India at present, where Vodafone has merged its business with that of Idea Cellular, and where it is still merging tower business Indus Towers (in which it owns 42%) with Bharti Airtel to create the world’s largest tower company outside China.

All in all, Vodafone has over 535 million mobile customers, almost 20 million broadband customers and 14 million TV customers. It offers 4G mobile data services in 23 countries, with 84% coverage across Europe.

Vodafone also has an enterprise division that provides communications, Internet-of-Things (IoT) and, since signing a partnership with cloud provider IBM in January 2019, cloud computing services to businesses, the division accounts for 30% of Vodafone’s total revenue.

Vodafone shares: the basics

Vodafone shares listed on the London Stock Exchange in 1988 and currently trade under the ticker ‘VOD’. The stock is a constituent of the FTSE 100 and other indices including, but not limited to, the FTSE 350, FTSE All-Share, FTSE Eurotop 100, FTSE Eurotop 300 and the FTSE techMARK All-Share.
There were 26.77 billion Vodafone shares in issue as of 21 May 2019. Shareholders can use this figure to calculate their individual stake in the business.

Vodafone key personnel: who manages the telecoms giant?

Chairman Gerard Kleisterlee: Kleisterlee has been chairman of Vodafone since 2011 after leaving a career with Koninklijke Philips Electronics that lasted for more than three decades. He is also the deputy chair and a senior independent director of Royal Dutch Shell.

Chief executive Nick Read: Chief executive officer (CEO) Read took over at the helm of Vodafone in late 2018, having been promoted from chief financial officer. He originally joined in 2001 and held a number of senior roles across the business. He previously held senior finance positions at Federal Express and United Business Media.

Chief financial officer Margherita Della Valle: Della Valle took over as chief financial officer (CFO) after Read was promoted to CEO in 2018. She was with the business that went on to become Vodafone Italy since 1994, eventually becoming CFO for Italy and then the whole of Europe before moving up to the deputy role below Read.

How to trade Vodafone shares

If you want to speculate on the price of Vodafone shares you can do so via CFDs. This means you can go long – if you think the share price will increase - or short – if you think the Vodafone share price will decrease.

Trading CFDs allows you to take advantage of leverage. This means you get full exposure with just a fraction of the total cost. However, your profit or loss will be based on the full size of your position.

CFD trading Vodafone shares

A contract for difference (CFD) is a contract where you agree to exchange the difference in price from when you open the contract to when you close it. To go long, you would buy a CFD. To go short, you would sell a CFD.

What are CFDs?

How to analyse Vodafone shares

Vodafone is a vast business with operations spanning the globe. Below is a list of key figures and metrics to watch when Vodafone reports results:

• Revenue: This represents overall top-line growth of the business. Vodafone’s revenue has been in a steady decline for several years and the 6.2% drop in the last financial year represented a significant acceleration from the 2.2% drop reported the year before. The outlook suggests this will continue to fall as the focus is on improving profitability and reducing churn.
• Group service revenue: This is one of Vodafone’s alternative performance measures and represents the bulk of Vodafone’s revenue. Service revenue accounted for €39.2 billion of Vodafone’s €43.7 billion total revenue in the recently-ended financial year. This was down 4.5% on a reported basis last year but up 0.3% organically.
• Churn: This represents the percentage of customers leaving Vodafone. The company does not report specific churn figures in its financial reports but offers a fair amount of commentary on progress. It does, however, report this in its presentations that often released alongside interim and annual reports. The most important factor is that churn is reducing rather than rising. Shareholders can use this as one measure to evaluate how well its convergence strategy is working.
• Adjusted earnings before interest, taxes, depreciation and amortisation (EBITDA): This represents adjusted earnings before interest, tax, depreciation and amortisation, which strips out those exceptional costs to give a better view of the underlying performance of the business.
• Organic adjusted EBITDA: This is a new measure that will feature more in Vodafone reports going forward. It evaluates the organic growth in earnings delivered by the underlying business.
• Pre-tax profit and loss: The bottom-line profit or loss made by the business. Vodafone turned to a loss in the last financial year.
• Free cashflow pre-spectrum: This represents free cashflow but excludes the sums paid during any spectrum auctions, which can fluctuate year-by-year. Again, this is supposed to give a better view of the underlying performance but shareholders should pay equal attention to cashflow after the spectrum too because this is the ultimate result: the pre-spectrum figure rose 0.5% last year to €5.4 billion but was 9.1% higher including spectrum at €4.4 billion.
• Dividend: Vodafone has historically been one of the most reliable dividend payers in the market but after cutting its dividend for the first time in the last financial year investors will now be wary of future payments. Dividends should be progressive going forward but it will take some time before it recovers the 40% cut. Cashflow generation and debt reduction will be key metrics to watch to identify Vodafone’s ability to grow dividends.
• Debt and leverage: Vodafone is aiming to reduce debt over the next few years to reduce leverage to the lower-end of its 2.5x-3.0x range. It has said reducing debt takes priority over investment, so investors should analyse the relationship between investment and debt (ie how much has investment and capex grown compared to the rate of debt reduction).
• Cost-savings and synergies: Vodafone is eagerly finding ways to cut costs across the business to offset the reduction in revenue and customer churn. It is continuing to sign new partnerships to deliver synergies and cut the heavy investment burden it faces, and has said it will sell off non-core operations and monetise its tower infrastructure businesses. With top-line growth lacking, cutting costs is one of the main ways Vodafone is trying to improve profitability.

Vodafone financial performance

It’s most recent financial year to the end of March 2019 was a struggle. Vodafone has been losing customers across the board over recent years, which has forced it to focus on the likes of reducing churn rather than growing its customer base organically. Revenue has been on a downward trajectory as a result, although Vodafone has had better luck stalling the drop in gross profitability.

Tthe biggest concerns for shareholders was the fact Vodafone turned to a vast loss in the year after booking billions in writedowns against its Indian and Spanish businesses, which prompted it to cut its dividend by 40%, which Vodafone described as a ‘rebasing’.

Vodafone and others in the industry are having to invest large amounts in order to begin rolling out 5G networks and faster broadband services. It has had to spend huge sums securing spectrum and bidding for things it needs now but won’t see a return on for some time. This, combined with the fact growth in both core markets like Germany and emerging ones like South Africa has tapered off, was why Vodafone made the first dividend cut in its history.

Key figures

What is Vodafone’s strategy?

Vodafone revised its strategy in late 2018, outlining five pillars to drive future growth. It generates just under half of all its revenue from European consumers and is focused on selling more products to each customer. Known as convergence, bundling more products and supplying more vital day-to-day services to people is a way of increasing loyalty and reducing churn, a crucial target considering it has been losing customers over recent years. Mobile churn has fallen from 18% in the 2015 financial year to 14.8% in the most recent one, while the number of fixed broadband customers has risen consistently each year from 12 million in 2015 to 17.4 million today.

In addition, with faster 5G and broadband services coming online, Vodafone believes it can raise the average revenue it generates from each customer by upselling to better services. 5G is currently an expensive endeavour for the entire telecoms industry but one that should reap rewards over the longer term: Vodafone believes the cost of supplying 5G will be ten times less than it is as present. The purchase of Liberty Global’s European assets will cement its position as the market leader in Europe and give it a much larger customer base to pursue, as well as a better chance of competing against its main rivals like Deutsche Telekom.

^{Source: Vodafone 2019 annual presentation}

It is also trying to increase the amount of cross-selling it does to business customers, predominantly in fixed-line services (phones and broadband), IoT (smart internet-connected devices) and cloud-computing services (through its deal with IBM). Vodafone expects its expansive international presence to make cross-selling easier to its multi-national clients, which generate about 20% of its business revenue. For government and institutions, Vodafone is focused on introducing more IoT devices to more industries. After initially specialising in IoT for the insurance and automotive industries, it is now moving into new and potentially larger sectors such as healthcare, logistics and smart buildings. The focus on fixed-line and IoT services is expected to offset the continued decline in revenue from offering mobile services to businesses.

Vodafone is continuing to penetrate its emerging markets across Africa and the Middle East, where only 28% of its mobile customers currently use 4G – providing plenty of headroom to grow. Penetrating more of the market will be key if it is to bring down the cost of supplying 4G in these markets. More interestingly, Vodafone is expanding further into financial services in parts of Africa by building upon M-Pesa, a hugely popular payments platform used across Africa. Over 37 million people – most of which have little access to banks or physical financial services – use M-Pesa and the platform has facilitated over €10 billion worth of payments and generated €750 million in revenue for Vodafone in the most recent financial year. Vodafone has decided to capitalise on the opportunity by expanding into more financial services, starting in South Africa.

Vodafone’s ‘Digital First’ programme is hoping to accelerate the company’s digital strategy to ensure it capitalises on the demand that will spawn from new technological developments like big data, artificial intelligence and robotic automation. This also involves reducing costs by using more technology and reducing the intensity of labour: for example, it is now acquiring 17% of new mobile customers online compared to just 9% two years ago and the introduction of robot AI ‘chatbots’ to help with online customer queries has led to a 12% reduction in calls to its customer support centres.

Vodafone has also launched ‘digital-only’ brands that have lean business models offering simpler plans to consumers. This includes Voxi in the UK, Vodafone Bit in Spain and Ho in Italy. There is a very similar trend occurring within the banking industry, where big banks are establishing new online-only brands to attract new, typically younger customers and lower the cost of doing business.

The last spoke of Vodafone’s strategy is all about improving how it utilises its assets. The firm is looking to partner-up with more companies and rivals, so they can share the hefty cost burden of deploying 5G networks and speed up the process. For example, new infrastructure partnerships in Italy and Spain should trim €200 million in costs per year for Vodafone. It is also trying to monetise its multiple tower businesses in a similar way it is doing in India. It is currently considering a merger of its towers in Italy with two different companies and is mulling other possible deals in the UK, Spain and the Netherlands. Vodafone argues it has a great track record of delivering cost-saving or synergy targets earlier than planned, with the Vodafone India-Idea Cellular merger delivering the anticipated synergies two years sooner than expected while its new Dutch joint venture, VodafoneZiggo, was integrated one year ahead of schedule.

Vodafone guidance: what’s the outlook?

Vodafone is adopting new accounting methods in the 2020 financial year, which will see it report some new alternative performance measures going forward, namely organic adjusted EBITDA and free cashflow pre-spectrum. Below is a list of financial targets Vodafone has set:

• Vodafone has warned that it expects customer churn to continue in the 2020 financial year but has said its convergence strategy should see an improvement.
• Adjusted EBITDA should be in the range of €13.8 billion to €14.2 billion in 2020, compared to the €14.1 billion delivered in the last financial year. Vodafone says this would represent ‘low single digit organic growth’ in adjusted earnings for the year, having delivered 3.1% in the recently-ended financial year (in-line with revised guidance of 3%).
• Free cashflow pre-spectrum will be ‘at least’ €5.4 billion in 2020 after all mergers and acquisitions (M&A) activity, capex and restructuring costs have been taken into account. Free cashflow pre-spectrum in the last financial year was €5.4 billion, suggesting it expects a fairly flat result.
• After delivering €400 million of reductions in the most recent financial year, Vodafone reiterated its goal for operating costs in Europe and its shared common functions to be €1.2 billion lower in the 2021 financial year compared to 2018. Total savings so far amount to €800 million, giving it two financial years to find the last €400 million.
• To reduce debt over the next three years and bring leverage down to the lower-end of its 2.5x-3.0x range.
• To sign further infrastructure-sharing agreements and secure more partners, enough that it believes it can mitigate the rising costs expected from deploying 5G in the coming years.

Vodafone dividend: what’s the outlook?

Vodafone cut its dividend for the first time in its history in the last financial year and lost its crown as the only major European telecoms stocks to have avoided a trim over the last 30 years. Vodafone has argued this will give it the headroom it needs to continue investing in the business and to help reduce debt over the next ‘few years’. Net debt fell almost 9% over the last year to just over €27 billion. It plans to grow the dividend annually through a progressive pay-out policy.

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