Vodafone caution casts pall on £4.5 billion buyback

Cell phone giant Vodafone Group Plc announced a £4.5 billion share buyback and doubled its dividend yesterday, but concerns about rising competition and a trimmed forecast sent its stock sinking.

The share repurchase plan from the world's top mobile phone group by revenue hit the upper-end of expectations. But it had been well-flagged and investor attention swung to comments about tough markets, a struggling Japanese unit and margin pressure.

"All around the world, we are seeing slightly greater competition, whether it is from operators that choose to have their networks or MVNOs (Mobile Virtual Network Operators)," Chief Executive Arun Sarin told a conference call.

But he said Vodafone, with 154.8 million customers in 126 markets around the world, had the scale to offset competition and noted that the company had outperformed its top German and Italian rivals in terms of profit and revenues and its top Spanish rival on a revenue basis.

Nevertheless, Vodafone forecast that free cashflow would fall to £6.5 billion-£7.0 billion in the year to March 2006 from 7.8 billion, partly due to lower dividends from US joint venture Verizon Wireless. Margins would be flat or one percentage point lower, it said.

Although earnings before interest, tax, depreciation and amortisation (EBITDA) rose to £13.041 billion from 12.64 billion on revenues of 34.13 billion - the top end of forecasts - its shares had tumbled 4.1 per cent to 140-1/2 pence by 1000 GMT.

"We wonder, post results, what catalysts there are to drive the share price higher," said Nomura telecoms analyst Mark James, noting that Japan remained a tough nut to crack.

"With the buyback confirmed, investors may return to fretting about the problem areas."

Brokers Cazenove downgraded the stock, which had risen sharply ahead of results, to "in-line" from "outperform".

In Japan, arch-rivals and KDDI continue to dominate one of the world's most sophisticated cell phone markets, and Vodafone said its third-ranked Vodafone posted a 25 per cent fall in operating profit and two per cent lower revenues in local currencies.

Mr Sarin conceded it would take the full two years to the end of next March to turn around the business, which reported its fourth consecutive month of customer losses this month. But he insisted that an improved handset range, network, content and services would ensure growth after 2006.

"We are confident that in the next year we will have turned our company around," Mr Sarin told the conference call. "Beyond the May 2006 time period, we will enter a growth period in that business... This is not an easy fix and it's not a quick fix."

In Tokyo, Vodafone K.K.'s Chairman Shiro Tsuda, who has been handed the job of reviving the flagging business with former Vodafone UK chief executive Bill Morrow, was asked whether the unit would report another operating profit decline this year.

"It's true that we're in a tough position," he said.

But some fund managers were patient. "They (Vodafone) are simply asking for time," said Tim Rees, a fund manager at Insight Investments. "They've been very open about the fact that it's an 18 month to 24 month issue."

Elsewhere, Vodafone said its operations in the United States and Spain both saw revenues surge by more than 20 per cent year on year, while European markets such as Italy, Germany and the UK "performed well", despite rising competition.

The group, which reported a 14 per cent rise in earnings per share to 10.41 pence before goodwill and exceptionals, also noted that its balance sheet remained strong enough for selective acquisitions, despite beefed-up shareholder returns.

The company's total dividend of 4.07 pence is part of its strategy to increase a payout ratio of 22 per cent of earnings, which had been low by industry standards.

Vodafone, whose subscriber base has risen by 16.3 million over the year, said it had sold 2.4 million of its high-speed, third-generation (3G) mobile video phones and that 30.9 million customers now used its flagship live! phones.

The company also gave a more detailed forecast for the year to March 2006. It predicted mobile revenue growth of six to nine per cent and an EBITDA margin flat or one percentage point lower than this year. It had previously forecast "high, single digit" mobile revenue growth and "broadly stable" EBITDA margins.