Shares in Vodafone (LSE: VOD) have not had a great few months. The Vodafone share price is 12% below where it began the year – and half of what it was five years ago.
The shares have a dividend yield of 10.4%, which suggests to me that many investors may doubt how likely the shareholder payout is to be maintained.
But I see value here and think the latest development at the company could help boost the share price in coming months.
Spanish sale agreed
Today (31 October), the company announced it has entered into binding agreements to sell Vodafone Spain. It is set to receive at least €4.1bn in cash and could get up to €0.9bn in redeemable preference shares.
At surface level, retreating from a major European market might not look like a step in the right direction.
But I see it as positive for Vodafone shares for two reasons.
First, by concentrating on where it has the biggest scale and opportunity, I think Vodafone could improve its total business performance. Secondly, the cash could come in handy as a way to support the dividend, pay down some debt, or both.
Long-term dividend potential
The Vodafone dividend has long looked at risk of a cut due to lacklustre business performance and high debt load. Since the most recent cut in 2019, it has been flat.
Selling off the Spanish business will likely reduce earnings meaningfully. Longer term, that may not seem ideal, although it does at least help free up the company to focus on its biggest opportunities and key markets. Increased competition and inflationary pressures in the Spanish market have affected Vodafone’s business performance there in the past few years.
In the short term, I think the cash injection could come in handy.
In a high interest rate environment, I think it makes sense for the company to keep reducing its debt pile. Net debt in the company’s most recent financial year fell around a fifth, but still stood at €33bn.
I also reckon the cash could ease pressure on the company to cut its dividend.
Share price outlook
The market greeted the news coolly, with Vodafone shares opening slightly down in morning trading.
Over the longer term though, I think the move could help boost the share price. It shows the company continues to move decisively to reshape itself. I reckon a smaller, less indebted and more focused Vodafone could merit a higher valuation than the company currently has.
Keeping the dividend at its current level could also help boost the share price in my view.
The statement about the Spanish sales made no mention of this. It may be the case that Vodafone losing its Spanish earnings justified a dividend cut.
But I also think the cash injection buys a cushion of time during which management can seek to improve overall business performance. If that happens, and debt keeps falling, there could be a firmer financial basis to maintain the dividend than before.
For now, I have no plans to sell my Vodafone shares.
