Vodafone kept afloat by Verizon dividend as Spain, Italy hit results

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Vodafone blamed deepening economic problems in Spain and Italy for a first-half net loss of £1.98 billion, compared to a £6.68 billion profit a year earlier.

The global operator is writing down the value of its businesses in Spain and Italy by £5.9 billion as consumers in recession-hit Southern Europe cut back on spending. Overall, revenues fell to £21.8 billion in the first-half of the year, down 7.4 per cent from £23.5 billion a year ago.

However, Vodafone got a boost from a £2.4 billion dividend payment from Verizon Wireless, although this is lower than the £2.9 billion dividend the company received last year. Vodafone holds a 45 per cent stake in the operator while Verizon Communications holds the 55 per cent majority stake. Vodafone, which will receive the payment by year-end, will start a £1.5 billion share-repurchase program after receiving the Verizon dividend.

Some investors registered their disappointment by the smaller-than-expected dividend from Verizon Wireless, with Espirito Santo analyst Will Draper telling Reuters: "If you stripped out the impact from the U.S. then these results would look pretty poor, and that's a problem."

Vodafone CEO Vittorio Colao said he was pleased with the Verizon Wireless partnership. "I would say there are more uncomfortable things in life than being linked to a fantastic company [Verizon Wireless]," he told reporters, according to Reuters. "It's a great asset. If it's paying dividends at this rate, I'm not so sure that my shareholders will complain."

However, also of note were poor results from Germany, the UK and Australia, while organic service revenue for the whole group--a key financial metric which excludes acquisitions and one-off costs--fell 1.4 per cent in the three months ending Sept. 30, worse than the 0.7 per cent decline predicted by analysts, according to Reuters.

As a result of weak trading and unfavourable currency moves, Vodafone said it expected free cash flow for the full financial year to be in the lower half of its guidance range.

Sanford C. Bernstein analyst Robin Bienenstock told Reuters that, while group guidance was maintained, it is the accounting of Verizon Wireless profits that will hold up the results, "revealing a business that has little ambition or optimism to improve the performance of controlled operations."

Analysts with UBS, which has reiterated their "buy" recommendation for Vodafone, remain positive about Verizon's contribution. "The Verizon Wireless dividend is significant in our view," they wrote, according to Sharecast. "We believe that payments may now come more often and prove larger than expected; Verizon Wireless has shown it will pay out excess cash."

However, the UBS analysts registered their concern that pricing for calls and text messages in Vodafone's larger markets are coming under increasing pressure. "Meanwhile cost control outside Spain appears limited, with estimated cost (pre-mobile termination rate cuts) up 2.9 per cent in the UK, Italy and Germany. Given the weak top line this is not sustainable."

For more:
- see this Vodafone release
- see this Bloomberg article
- see this Reuters article
- see this Sharecast article
- see this Daily Telegraph article

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