Questor: watchdogs are taking the heat off Vodafone and it’s getting a grip on costs. Buy

Broadband has enabled at least some of the economy to keep going during lockdowns so you would expect Vodafone, now a provider of internet access as well as mobile phones, to be holding up well during the pandemic. So it is – but the consequences of Covid-19 go beyond the millions of captive customers working from their kitchen tables.

The profitability of mobile and broadband firms does not depend only on keeping customers happy: the decisions of regulators are important too. And the pandemic is changing the watchdogs’ attitude to Vodafone and its rivals across Europe, where the firm makes most of its money.

Regulators and politicians have realised how much a locked-down economy depends on fast, reliable internet access in people’s homes. They, like the rest of us, also realise that working from home is here to stay even when the virus is defeated.

They won’t get those fast, reliable networks if their price controls are so strict that broadband companies are denied a decent return. They also know that broadly speaking, consumers are not paying an excessive price for their broadband or their mobiles.

So there are signs that they are beginning to loosen the reins a little, investors in the sector told this column. This alone should be enough to get investors to take another look at Vodafone, long a disappointment to the City. But more is going on.

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Vodafone tends to enjoy a number one or number two position in the countries it operates in, and it tends to attract the bigger corporate customers, which are less price-sensitive.

But these markets are still highly competitive and Vodafone, once a highly centralised organisation, has recognised that you have to respond to competition at the country level. So it now lets local managers decide how to react to developments in their markets.

The advent of 5G will also encourage some customers to spend more in return for higher data speeds.

Vodafone has also taken action to reduce costs. Customers who have problems are now able to deal with them themselves via apps – a less frustrating experience than hanging on for a call centre. So Vodafone can spend less on its call centres – and on its shops – and customers are happier, so they are more likely to remain loyal.

“Churn” rates have fallen from 16pc to 13pc over the past three years. Hanging on to your customers is of course cheaper than acquiring new ones.

Then there is what Vodafone is doing with its masts business. It has created a separate company called Vantage, which now owns 68,000 base stations.

Vantage is due to list on the stock market, probably in Frankfurt, later this year and the proceeds will be used to reduce Vodafone’s debt pile, which is on the high side. We can hope for a boost to the shares as a result because institutional shareholders tend to shy away once debts exceed a certain level relative to profits.

Vodafone will retain a controlling stake in Vantage for the moment at least, so that it can continue to decide where its masts are located.

The company’s glory days of explosive growth are a long way behind it. The most shareholders can hope for is a gentle rise in profits as cost control, adroit pricing and operational efficiency come into their own. The end of travel restrictions, which have hobbled mobile firms’ normally lucrative roaming income, will also help.

But it makes sense to buy the shares only if current levels of profitability are not being properly valued by the market. Key to this judgment is the dividend. The headline yield figure of 6.3pc looks attractive but the divi is only now starting to be covered by profits.

If dividend cover were at the level often regarded as safe, namely two, the yield would be a less enticing if still useful 3pc or so. More positively, the fact that dividend cover is going in the right direction means that we need not fear a cut, even if any rise will probably have to wait for debt levels to fall further.

Questor’s view when we last looked at the stock in May 2019 was that there was no reason for new investors to get on board, although there was equally no reason for existing holders to sell.

Now, in view of the improving regulatory outlook and the hopes for improving profits, better dividend cover and falling debt, we will upgrade to buy.

Questor says: buy

Ticker: VOD

Share price at close: 124.84p​

Read the latest Questor column on telegraph.co.uk every Sunday, Tuesday, Wednesday, Thursday and Friday from 5am.

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