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Are Vodafone and BT bosses up to the challenge?, analysts question

Some investors have asked whether BT's chief executive can survive as he tackles such challenges as regulation, pensions and tough competition
Vodafone CFO Nick Read is to replace Vittorio Colao as CEO later this year

The departure of Vodafone Group PLC’s (LON:VOD) chief executive sent shares in the telecoms company lower on Tuesday as some analysts questioned whether his successor was the most suitable candidate to steer the ship in the right direction. 

Vittorio Colao will stand down in October after almost a decade at the helm of Vodafone.

He will hand over the reins to Nick Read, who has been chief financial officer for the past four years. Deputy chief financial officer will succeed Read.

Shares in Vodafone fell 3.4% to 199p in afternoon trading.

READ: Vodafone announces departure of CEO Vittorio Colao as it swings to full year profit

Under Colao’s leadership, Vodafone has undergone a restructuring to focus on its core markets in Europe and to reshape the company into a digital communications operator.  

As part of the overhaul, Vodafone has exited non-core markets, including India and the US, and embarked on a plan to expand in its core market of Europe.

Earlier this month, Vodafone agreed to buy Liberty Global’s cable operations in Germany and Central Europe in a deal valued at €18.4bn. 

Investors 'sceptical' about new Vodafone CEO

Artjom Hatsaturjants, research analyst at Accendo Markets, said:Colao has in past sought to exit many of Vodafone’s non-core markets (e.g. India, US), but investors look sceptical about whether his replacements can steward the massive acquisition programme in Central and Eastern Europe to drive future revenue growth not just in the medium-term, but for the longer haul.

“After 10 years of stability under Colao, Vodafone is potentially setting sail into uncharted waters under the guidance of an executive that has been with the company only 4 years and has less top level experience than the markets would have been fully comfortable with.”

But another analyst pointed at the Colao has struggled to do much for the company’s share price during his tenure.

Russ Mould, investment director at AJ Bell, said Vodafone’s share price is up just 23% over the time Colao has been in charge against a 45.2% advance for the FTSE 100.

“Of course, this ignores the significant sums returned to shareholders through dividends and share buybacks and the performance of the shares under Colao may not reflect any failings on his part,” he said.

“After all, Vodafone is an established player in a mature market and has few levers to pull for growth.”

He added: “Ultimately Colao’s successor, current chief financial officer Nick Read, could also be running to stand still.”

BT's boss under pressure to turnaround the business

Likewise, some investors have been questioning whether the chief executive of rival telecoms giant BT Group PLC (LON:BT.A) can survive as he tackles the challenges of regulation, pensions, high costs and tough competition.

Gavin Patterson, who joined BT as chief executive in 2013, last week unveiled plans to cut 13,000 managerial and back-office jobs and to leave the London headquarters as part of his new strategy to reduce costs.

READ: BT Group shares drop as it slashes 13,000 jobs and revenues fall, but dividend maintained

“13,000 job cuts and a move out of central London are drastic actions, and should help deliver £1.5bn in cost savings. But they still aren’t going to be enough to dig BT out the hole it’s in,” according to George Salmon, equity analyst at Hargreaves Lansdown.

“The dividend, which was rising 10% a year not so long ago, is set to freeze for the foreseeable future, and next year’s profits look likely to fall again.”

The strategy update, which follows a tough 2017 that included an accounting scandal in Italy, came as the group reported a 1% decline in full year revenue to £23.7bn and a 2% drop in adjusted underlying earnings (EBITDA) to £7.5bn.

BT left its full year dividend unchanged at 15.4p even as it said it expects adjusted EBITDA to fall to £7.3bn - £7.4bn.

Shares have continued to drop since the full year results and strategy update last Thursday. In afternoon trading on Tuesday, shares were down 1.4% to 208p.

Vodafone returns to full year profit but revenues drop

In comparison, Vodafone said it swung to a full year profit of €2.5bn in the year to March 31, 2018 from a loss of €6.3bn last year.

However, last year’s results included a one-off €4.5bn charge in relation to merging its India business with the country’s mobile phone provider Idea Cellular Limited.

Total revenue fell 2.2% to €46.6bn, mainly due to the foreign exchange headwinds and the negative impact from the deconsolidation of Vodafone Netherlands following the creation of the VodafoneZiggo joint venture with Liberty Global.

Vodafone raised its final dividend by 2% to €0.1023, bringing the total payment for the year to €0.1507.

The full year dividend puts its yield at around 6.4%.

“Despite continued investment in the business, such as India and the Liberty Global Germany acquisition, Vodafone has again raised its dividend in view of its own confidence in prospects, and the current yield of 6.4% is a strong invitation to investors who are being paid handsomely to wait whilst the strategy unfolds,” said Richard Hunter, Head of Markets at interactive investor.

Should BT cut its dividend? 

BT’s dividend yield sit at over 7% and some analysts have asked whether it should cut the dividend or scrap it completely and invest the money elsewhere.

It could use the money for its pension scheme or to support its plans to upgrade the UK’s broadband infrastructure to improve internet speeds.

BT has agreed a new 13-year funding plan for its pension, which had a deficit of £11.3bn at the end of June. The group will pay £2.1bn into the scheme by 2020 and a further £2bn will be funded by the issuance of bonds.

READ: BT Group dives again; how much worse could it be were it to cut the divi?

“BT has paid its shareholders £10.7bn in dividends in the last decade, almost the size of its current pension deficit,” said Justin Cooper, chief executive officer of Link Market Services

“Shareholders still need the company to invest for the future, and they are on the hook for the company’s pension scheme one way or another. The big cost reductions BT has announced today will protect the dividend for the next couple of years, but its longer-term prospects are still unclear.”

BT is also under pressure by regulator Ofcom to deliver on its plans to connect fibre broadband into three million premises by the end of 2020.

It also needs to carry out the upgrade to fend off competition from the likes of CityFibre (LON:CFHL) and Vodafone, which have joined forces to build a new ultra-fast broadband network for five million homes and businesses in the UK.

In April, CityFibre agreed a £538mln takeover by a consortium formed by private equity firm, Antin Infrastructure Partners, and Goldman Sachs’ West Street Infrastructure Partners, giving the company more fire power to back its new broadband network. 

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