Hold The Phone

Image source: Khosro – Shutterstock

What's going on?

Alarm bells are ringing for Vodafone shareholders: the telecom company released results on Tuesday that confirmed a list of problems as long as a phone book.

What does this mean?

You’d think telecom stocks would be a safe bet in today’s trying times, what with their generally stable revenues and juicy dividends. But a quick look at Vodafone’s shares – currently languishing at 25-year lows – blows that theory apart. See, the British cellphone operator’s fighting battles on a few fronts, including dizzying energy costs, higher interest repayments on its debt, and fierce competition. But the real war’s being fought in Germany, Vodafone’s biggest market, where it’s under pressure to shell out big bucks to upgrade its network and stop a slow bleed of customer losses. No surprise, then, that the firm’s shares tumbled when it cut its cash flow outlook for this financial year by around 5%, leaving it lying around the $6 billion mark.

Why should I care?

For markets: Something’s gotta give.
Vodafone’s chunky 7% dividend yield – that’s its annual dividend payment as a percentage of its stock price – is one of the top ten in the UK, which might make it look like an out-and-out steal. But dividend-hunters beware: payouts can only be made from the cash that’s left over when day-to-day costs and one-off expenses have been taken care of. And right now, the cost of everything from energy bills to wages is only going up.

The bigger picture: Till debt do us part.
Let’s be real: most of us would turn down our heating before giving up our phones. That’s one reason why revenues tend to be so stable for telecom companies, and that dependable income means they can usually borrow on the cheap to fund things like dividend payments and network upgrades. Now, debt’s hunky dory when interest rates are low, but when rates drift higher like they’re doing now, the resulting higher interest payments can weigh on a firm’s profit – and its stock price.

Originally posted as part of the Finimize daily email.

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