Recently taking over at the helm, Vodafone’s (NASDAQ:VOD) new CEO Margherita Della Valle jumped right into the pressure cooker, announcing on Monday that she would cut 11,000 jobs globally over the next three years. Following a poor performance in Germany — Vodafone’s biggest market — the telecommunications stalwart must regain its competitive edge. However, VOD stock responded poorly to the Vodafone layoffs, shedding nearly 8% on Tuesday afternoon.
Worryingly for many investors, the Vodafone layoffs represent the biggest in the company’s history, according to Reuters. At present, the telecom employs 90,000 people directly across Europe and Africa. Underlining the urgency at the embattled organization, just last month, Della Valle held the chief financial officer role.
Primarily catalyzing the Vodafone layoffs was Germany. The telecom forecasted 3.3 billion euros ($3.6 billion) of cash flow this fiscal year, down from 4.8 billion euros ($5.2 billion) in the year to end-March 2023. In contrast, analysts expected 3.6 billion euros ($3.9 billion). Specifically, Vodafone’s CEO “…put the lower forecast down to the timing of payments for cable TV in Germany due to a change in the law,” per Reuters.
Della Valle also stated that “structural change” — translating to a full or partial sale — represented an option in Spain.
According to the news agency, Vodafone’s central operations in the U.K. will incur 500 job cuts. At ground zero in Germany, management will axe 1,300 roles, per its statement in March. Another 1,000 workers will be let go in Italy.
Vodafone Layoffs Lack Credibility
“To consistently deliver, Vodafone must change,” Della Valle said regarding the Vodafone layoffs. “My priorities are customers, simplicity and growth.” Still, one issue that might not change immediately is the telecom’s massive dividend. Currently, the forward yield stands at a whopping 8.72%. In contrast, the communication sector’s average yield is only 2.62%.
Per Reuters, Della Valle stated that Vodafone’s dividend was a matter for the board. However, she mentioned “significant” cuts in debt, remarking that the telecom was comfortable with its leverage. Still, the disclosure didn’t impress onlookers.
“The new CEO has decided to maintain its dividend (a missed opportunity in our view and a concern the company remains unwilling to take necessary bolder action),” analysts at U.K.-based JPMorgan Cazenove said.
As CNN Business pointed out, the Vodafone layoffs represent a major reversal of fortune. Two decades ago, Vodafone took the enviable role as the world’s biggest mobile telecom group. This status followed a $190 billion deal to buy out Germany’s Mannesmann in 2000, the largest takeover in history.
Unfortunately, the once-domineering telecom firm — which features a business footprint encompassing 21 countries — has struggled to retain market share. Still, the Vodafone layoffs don’t just center on company-specific challenges. Rather, McKinsey & Company notes that European telecoms fared poorly over the past decade, delivering lower returns to shareholders than their American counterparts.
Why It Matters
According to TipRanks, only one analyst covers VOD stock within the past three months. Bank of America’s David Wright pegged VOD as a “buy.” Wright reiterated the bullish call from the original issued in January this year. At the time, the price target represented a nearly 50% increase in value.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.