Hold The Phone

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What's going on?

Alarm bells are ringing for Vodafone shareholders: the telecom company released results on Tuesday that confirmed a list of problems as long as a phone book.

What does this mean?

Youd think telecom stocks would be a safe bet in today’s trying times, what with their generally stable revenues and juicy dividends. But a quick look at Vodafones shares currently languishing at 25-year lows blows that theory apart. See, the British cellphone operators fighting battles on a few fronts, including dizzying energy costs, higher interest repayments on its debt, and fierce competition. But the real wars being fought in Germany, Vodafones biggest market, where its under pressure to shell out big bucks to upgrade its network and stop a slow bleed of customer losses. No surprise, then, that the firms shares tumbled when it cut its cash flow outlook for this financial year by around 5%, leaving it lying around the $6 billion mark.

Why should I care?

For markets: Somethings gotta give.
Vodafones chunky 7%dividend yield thats its annual dividend payment as a percentage of its stock price is one of the top ten in the UK, which might make itlook like an out-and-out steal. But dividend-hunters beware: payouts can only be made from the cash thats left over when day-to-day costs and one-off expenses have been taken care of. And right now, the cost of everything from energy bills to wages is only going up.

The bigger picture: Till debt do us part.
Lets be real: most of us would turn down our heating before giving up our phones. Thats one reason why revenues tend to be so stable for telecom companies, and that dependable income means they can usually borrow on the cheap to fund things like dividend payments and network upgrades. Now, debts hunky dory when interest rates are low, but when rates drift higher like theyre doing now, the resulting higher interest payments can weigh on a firms profit and its stock price.

Originally posted as part of the Finimize daily email.

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