I'll also be asking whether these negative factors make this FTSE 100 telecom titan a poor investment today.
No less than 24% of Vodafone's revenue and 30% of operating cash flows come from the pariah economies of southern Europe. Offhand, I can't think of another FTSE 100 company with that level of exposure to Portugal, Italy, Greece, and Spain.
How long will it take the so-called PIGS to fix their broken economies? Many years, one would imagine. Vodafone will have to try to forge ahead while dragging a dirty great anchor behind it.
Vodafone has developed cash-flow problems of late. The board has guided on free cash flow for the current year of 4.9 billion pounds from operations it controls, plus there's 2.1 billion pounds from U.S. joint venture Verizon Wireless, in which Vodafone has a 45% equity stake. So, total free cash of 7 billion pounds for the year.
Vodafone's dividend payout to shareholders will cost an annual 5 billion pounds going forward -- and that's if the dividend is never raised again. License and spectrum payments, which, like the dividend, come out of free cash flow, have averaged 2.3 billion pounds a year for the past three years. Analysts reckon the annual spend will average not much less than that for the next 10 years. So, dividend, license, and spectrum payments amount to about 7 billion pounds a year -- the same as expected free cash flow for 2013.
At current run-rates, then, Vodafone's shareholders are worryingly reliant for their dividend on uncertain and unknown levels of distributions from Verizon Wireless. Vodafone has no say on whether the U.S. company will continue to distribute excess cash, or on how much cash it will distribute, if it does.
Will it or won't it
Vodafone's cash problems would be solved in one fell swoop if it sold its stake in Verizon Wireless. Wireless' parent Verizon Communications has made no secret of the fact it would like to get its hands on Vodafone's stake.
If a deal is done, Vodafone could possibly net in excess of $100 billion. Wow! But then comes the question of whether that vast sum would be spent wisely or squandered.
Unfortunately, Vodafone's track record on acquisitions isn't exactly good. Recall, in particular, the company's history-making 79 billion pound takeover of German group Mannesmann at the top of the market in 2000, and a subsequent -- also history-making -- 28 billion pound asset writedown. That was the most spectacular, but not the only, occasion on which Vodafone has overpaid in the past.
A poor investment
Whatever else can be said about Vodafone, one thing's unarguable: Considerable uncertainty hangs over the company at present.
Southern Europe is an economic bog, and any deal on Verizon Wireless would produce a tectonic shift in Vodafone's business -- for better or worse, nobody can know. Then there's the more prosaic matter of the dividend. Sure, the yield is good at 5.7% on a 180 pence share price, but there are serious questions about the sustainability of the payout.
At the end of the day: there are plenty of companies around with little or no exposure to southern Europe; plenty of companies that can thrive merely by continuing to do what they're already doing; and plenty of companies offering an income of over 5%, but with more certain prospects of dividend growth.
Our leading dividend analyst believes the featured company can provide investors with real annual income growth for many years to come. Not only that, but he calculates the stock is trading today at over 100 pence a share below current fair value of 850 pence.