Barclays has downgraded Vodafone Group Plc to ‘equal weight’ from ‘overweight’, citing ongoing structural weakness in the company’s German business. The decision, announced in a note to clients, reflects concerns that Vodafone’s largest market by revenue will continue to drag on group performance amid regulatory headwinds and intense competition from Deutsche Telekom and Telefónica Deutschland.
Vodafone shares slipped 1.2% in early London trading to 68.5p, making it one of the worst performers on a largely flat FTSE 100 index, which edged down 0.1% to 7,625 points. The downgrade comes just weeks after Vodafone reported a 3.4% drop in German service revenue for the third quarter, partly driven by the loss of cable TV customers following a regulatory ruling that ended bulk billing for landlords.
Analysts at Barclays noted that the German turnaround plan, which includes cost-cutting and network investment, is taking longer than expected to yield results. “Vodafone’s German operations remain under significant pressure from both regulatory and competitive forces. We see limited near-term catalysts for a rebound,” the note said. The bank also trimmed its price target on the stock from 85p to 75p.
For UK investors, Vodafone is a staple of many pension funds and income portfolios due to its historically high dividend yield, currently around 11%. However, the company has already cut its dividend twice in recent years, and further pressure on cash flow from Germany could raise questions about future payouts. The telecoms sector broadly faces rising capital expenditure demands for 5G and fibre rollouts, while revenue growth remains sluggish across Europe.
Peel Hunt analyst James Lockyer commented that while Vodafone’s valuation looks cheap, “the German business is a millstone that will take time to resolve.” He added that investors should watch for any signs of improvement in German customer numbers or regulatory clarity before reassessing the stock.
Source: Barclays research note, Vodafone Q3 trading update, Peel Hunt commentary.