Vodafone should take voluntary dividend cut, JPM Cazenove says

Vodafone management should voluntarily cut the dividend to support deleveraging efforts and restore confidence to the under-pressure shares, said JPMorgan Cazenove on Monday.

On the heels of a “tough” 2018, Cazenove analysts said the recent service revenue downgrades “haven’t helped” but the “real issue” is investor angst about the company’s capital structure and dividend sustainability.

The acquisition of Liberty Global’s central and eastern European assets will take net debt from 2.4 times to EBITDA to 3.2 times, with purchases of 5G spectrum and joint ventures will stretch this to 3.8 times, which is not covered by equity free cash flow.

On Cazenove’s forecasts, leverage “barely improves” in the mid-term, implying “very limited room” to manoeuvre.

While management believes a €1.2bn reduction of operational expenditure over the next three years, supported by cost-cutting and non-core asset sales, can support deleveraging, improve dividend cover, and restore investor confidence, the analysts felt this was “feasible” but “worry the dividend debate is beginning to prove too great of a distraction”.

With this in mind, a voluntary dividend cut “may not be a necessity” but is “a sensible option”, with a 30% cut leaving the dividend well covered by free cash flow, support additional deleveraging and still offer an attractive 7% yield.

JPM Cazenove kept its ‘buy’ rating and trimmed its target price to 227p.