Broker snap: Nomura highlights concerns with Vodafone's dividend

20th Dec 2012 11:51

Nomura has kept its 'neutral' rating for telecoms group Vodafone, saying that the costs from last week's Dutch spectrum auction raise more questions of the company's 'inflated' dividend.The outcome of the auction was a surprise, with prices of over €2 per MHz pop for 800MHz (this compares with a previous high of €0.9 in Ireland) and over €1 per MHz pop for 900MHz, the broker said."The reason for the high prices was twofold: competitive tension caused by spectrum being reserved for new entrants and the consequence that winning bids were set by the opportunity cost for a strong third operator. "Typically, winning bids have been set by the opportunity cost for a fourth operator with far weaker market share and so we do not expect Holland to set a meaningful precedent for other auctions."Nomura reminded investors that 2G licence renewal (which accounted for 53% of the Dutch auction proceeds on its estimates) "will incur substantial investment for the industry". Meanwhile, further valuable spectrum in the 700MHz band is due to be allocated in Europe from 2018 onwards.The broker estimates Vodafone's spectrum bill to be at least £1.5bn annually for 2013-2016 (year-end March) and £20bn over 10 years. For the current financial year (ending March 2013), spectrum costs will be around £3bn, reducing controlled cash flow to £2.2bn, well below the dividend cost (£4.9bn)."Paying an inflated ordinary dividend has been discredited as a way to reward shareholders, it restricts strategic flexibility and it leaves Vodafone dependent on Verizon Wireless cash flows which compromises its ability to negotiate with Verizon. A review of cash return policy is overdue, we believe."Shares were down 0.61% at 155.7p in morning trade..BC