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Income: should you hang up on Vodafone

by James Phillipps on Feb 18, 2013 at 10:08

Income: should you hang up on Vodafone

Neil Woodford’s decision to sell out of Vodafone is a bold one and although this puts him in a minority in the equity income sector, he is not alone in falling out of love with the telecom giant.

The Invesco Perpetual star finished exiting the position last week with the move, coming the day after the company’s trading update, raising eyebrows.

Although Vodafone reported revenues fell by 5.2% in the fourth quarter, the market was cheered by the fact the company did not cut its growth forecasts and its shares rose by over 2% on the day.

However, Woodford, a long-term backer of the stock, believes it is a company in decline.

Invesco Perpetual director Mitchell Fraser-Jones says: ‘The company has reduced its forecasts for revenue growth on the back of ongoing weakness in its core southern European markets and the cash flow cover of the dividend has fallen to what we view as uncomfortably low levels.

‘The company announced a share buy-back rather than the hoped for special dividend with its dividend from Verizon Wireless, while we also have reservations about the company’s ability to maintain its margin on data revenues.’

Telecom sector under pressure

Clive Beagles and James Lowen, co-managers of the JOHCM UK Equity Income fund, have been long-term bears, arguing Vodafone and the wider sector face heavy capital expenditure requirements at a time when revenues are increasingly coming under pressure, putting pressure on dividend cover.

Lowen admits the sector is ‘cheap, but with negative fundamentals’ and says the pair believe Vodafone is in ‘dangerous territory’ in terms of the structural risks it faces.

‘Usage [is] increasing, but operators cannot monetise this, [they have] no pricing power,’ he says.

Both Woodford and the JOHCM pair’s call to zero weight the stock is out of step with their peers, with Vodafone a staple in the top 10 holdings lists of a vast number of UK equity income funds.

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