Sometimes, as a chief executive, what you don’t do is just as important as what you do.
Nick Read, the new chief executive of Vodafone, has proved this in spades today as the mobile giant unveiled its half-year results.
Concerns have been mounting among investors that Vodafone’s dividend is unsustainable.
The company spent big to become Germany’s largest cable operator in a blockbuster deal with Liberty Global (the owner of Virgin Media) earlier this year and, while it funded that transaction in an ingenious way that preserves its investment-grade credit rating, the company’s net debt at the end of September still stood at €32.1bn – a rise of 6.4% on a year earlier.
And, with Vodafone facing big costs with the roll-out of 5G services, it has attracted suggestions that the dividend is unsustainable.
Having fallen by 39% so far this year, the shares were yielding more than 8% going into these results, usually a sign that the market is expecting a dividend cut.
Accordingly, it came as a relief when Mr Read said this morning that while the dividend would be frozen until Vodafone can lower its debts, it will not be cut.
This is a company that has become increasingly important to UK institutional investors during recent years.
It is reckoned to account for £1 in every £14 worth of dividends paid by all listed companies during the last decade. That importance became all the greater when, for example, the ability of the banks to pay big dividends became curtailed following the financial crisis.
Even having not cut the dividend, though, Mr Read still faced questions over how he will pay for it.
One answer, supplied today, was cost-cutting. Vodafone plans to reduce its operating costs by €1.2bn by 2021.
Some companies are not always trusted when they pledge to reduce costs but, in the case of Vodafone, Mr Read – the former chief financial officer – could today point out that this will be the third consecutive year in which costs have come down. He also indicated that the company could raise capital by selling its mobile masts.
And there were also some clues in the accounts. Vodafone is always difficult to get a handle on in this regard.
The results are invariably distorted by the impact of acquisitions, disposals and write-downs, the latter a legacy of Vodafone’s stupendous past deal-making, and today was no exception.
Half-year sales fell by 5.5%, to €21.8bn, reflecting currency fluctuations and the sale of its business in Qatar.
The company reported a half-year loss of €7.8bn during the period against a profit of €1.2bn in the same period last year, mainly due to impairment charges in Romania and Spain and a loss being booked on the disposal of Vodafone India, which has merged with one of its rivals.
Yet Vodafone is always a company that has emphasised its ability to generate cash over whatever the headline profits or losses, with all their accounting distortions, may be.
So the key slide in Mr Read’s presentation to investors was probably the one in which he pointed out the company expects to generate free cash flow of €17bn in the three financial years ending in 2019, 2020 and 2021, sufficient to cover dividend payments, which currently cost €4bn a year.
Mr Read argues this €5bn represents sufficient headroom, given some of the other costs coming down the line, chiefly 5G spectrum payments.
That said, the Liberty Global deal did take Vodafone’s borrowings to just about the limit of where the company wants them to be, hence the need for more cost-cutting and potential asset sales.
That €32.1bn of net debt is supported, even after today’s rise in the shares, by €45bn worth of equity.
The new chief executive could also report that Vodafone is on course to grow its earnings before interest, taxation, depreciation and amortisation (EBITDA) for a fourth consecutive year but, worryingly, guided the market that growth this year may be lower than some analysts had previously expected.
Moreover, organic service revenues, the key measure of Vodafone’s core sales, actually went backwards in the tough Italian and Spanish markets, while growing to only a negligible extent in Britain and Germany.
So the bigger picture is that, for the foreseeable future, working at Vodafone is probably not going to be terribly pleasant.
The company has little financial room for manoeuvre, is enduring patchy growth in some of its biggest markets and faces several years of grinding out cost cuts.
There was a lot of bad news already baked into the share price. It is tempting to speculate that Mr Read would have loved, as many incoming CEOs do, to take an axe to the dividend.
The problem was that, as a senior member of the management team already, the option was closed to him.
(c) Sky News 2018: Vodafone dials in dividend despite cut pressure