Vodafone shares mauled by bears again

Our head of markets explains why unloved Vodafone's share price hasn't been this low since summer 2010.

Vodafone (LSE:VOD) is a complex business and has, over recent years, largely changed its focus and even its structure.

Various historical forays into countries such as India and certain acquisitions have simply not worked. Part of the reason for this, especially of late, is the limited pricing power which accompanies mobile phones, while at the same time fixed costs remain high. In addition, the merits of the proposed Liberty Global (NASDAQ:LBTYA) deal are clear, but bring additional cost and integration risk. 

Most revenue metrics for the third quarter are under pressure, with additional headwinds coming from foreign exchange. Of particular concern is a growing voice within the investment community that the dividend itself, where the current yield of 9.3% is a patent invitation to income-seeking investors, could become unsustainable given pressures on revenues.

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Yet bulls of the stock remain, and have done so throughout Vodafone's chequered past. There are some signs of progress, such as the important German and UK markets, which are holding up reasonably well. The company has also highlighted positive trends in Italy and Spain, although these have not yet translated into a meaningful financial contribution. 

Source: TradingView (*)  Past performance is not a guide to future performance

Meanwhile, the group's expansion into offering multiple products is showing promise and, further out the potential sale of Vodafone's UK tower assets could bring some capital relief. In addition, tie-ups with the likes of Telefonica (XMAD:TEF) and International Business Machines (NYSE:IBM)could bring synergies, there is no statement from the company to suggest any pressure on the dividend, although it was prudently held at the last update, and Vodafone has maintained its guidance for the full year. 

In due course, the group also sees the Liberty Global deal as providing further cost-saving opportunities, on top of the aggressive programme already in place.

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The share price has suffered amidst the company's complexity and fierce competition within the sector. It has dropped 36% over the last year, as compared to a 10.5% dip for the wider FTSE 100 index, and has fallen 19% in the last six months alone. 

Even so, as has long been the case with Vodafone, the potential if not the execution is evident, which might explain the fact that the market consensus of the shares remains doggedly at a 'buy'.

*Horizontal lines on charts represent levels of previous technical support and resistance. Trendlines are marked in red.