A Very Quick Look at Vodafone's Earnings

LONDON -- Right now I'm trawling through the FTSE 100 and double-checking for blue chips that may be flattering their profits.

You see, many companies these days report "underlying" earnings, which are calculated by excluding costs the firm deems to be "exceptional." Trouble is, some companies are more cavalier than others when it comes to sweeping awkward expenses away from the headline figures.

Today I'm looking at Vodafone  (LSE: VOD.L  ) (NYSE: VOD  ) to see if its reported earnings have been distorted significantly by exceptional, one-off, or unusual items. I've extracted the following statistics courtesy of S&P Capital IQ:

Year to March 31

2008

2009

2010

2011

2012

Profit before unusual items

8,751

10,716

10,868

12,648

9,965

Goodwill impairment

-

(5,900)

(2,100)

(6,150)

(4,050)

Gain/(loss) on sale of investments

250

(627)

(94)

3,000

3,634

All figures in millions of pounds.

While annual figures can provide some insight into how a business has performed, I reckon looking back over several years provides a better view of possible problems in relation to one-off costs.

So between 2007 and 2011, my stats tell me Vodafone reported cumulative profits before exceptional items and tax of 53 billion pounds. However, aggregate exceptional costs came to 12 billion pounds -- equivalent to a significant 23% of cumulative "underlying" profits.

Goodwill impairment, which is when a company writes down the purchase cost of a previous investment, has been pretty much an annual occurrence for Vodafone in recent years (it also made a 11.6 billion pound writedown in 2007). The writedowns indicate Vodafone probably paid over the odds for the maze of global operations it built up during the last couple of decades.

However, it's important to remember that these writedowns are not cash-related, and so shouldn't affect Vodafone's ability to pay its current high level of dividends. In addition, Vodafone has also made healthy profits on the sale of some businesses in the last couple of years, which might suggest these large goodwill impairments might be less of a factor in the future.

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Stuart Watson does not own any share mentioned in this article. Motley Fool newsletter services have recommended buying shares of Vodafone. The Motley Fool has a disclosure policy.
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