Vodafone still attractive even if dividend is cut - analysts

Analysts were seeing the merits of Vodafone on Monday, with Kepler Cheuvreux upgrading its rating despite a potential dividend cut and Barclays seeing 50% share price upside.

"The key reason for investors to hold this stock is the dividend," said Kepler, having seen risks that the payout, in the event of a deal with Liberty, would not be sustainable and previously slapping a 'reduce' rating on the shares.

It has not been alone in this worry, with Vodafone's shares having fallen around 40% over the past 12 months.

The Kepler analysts still estimate that the Liberty deal would stretch net debt to greater than three times EBITDA, potentially jeopardising the credit rating, and so foresee a cut to Vodafone's dividend from €0.15 to "a more sustainable level of €0.11 per share".

But with the selloff in the shares having pushed Vodafone’s dividend yield to almost 10%, "signalling market belief in an imminent dividend cut", Kepler's view is that the reaction to a potential dividend cut is "too extreme".

Assuming a cut, the yield is "still appealing enough" and buying the shares now would leave the "opportunity to lock in great yield", so upgrading its rating to 'buy'.

Out with its note on Monday, Barclays said Vodafone’s quarterly update showed "positive early indications of commercial improvements" in the problem areas of Italy and Spain, though there was a hiccup in South Africa.

With management claiming that fourth quarter service revenues will be “the bottom”, Barclays said: "Until we see clear evidence of this, valuation and evidence of structural cost cutting/M&A appear the obvious attractions". The price target was cut 5% to 205p but that still implies plenty of upside potential.

Citi was another positive voice on the line, seeing an inflection in Europe.

While Vodafone has been having it tough in Europe, trends are slightly improving and as comparisons from last year get easier, further improvement is seen in 2019/20, with Italy "key to the recovery" and Germany "key to the outlook".