Vodafone Downgraded as Three Merger Impact Heavy on Valuation

Bank of America downgraded Vodafone (LON: VOD) shares from Buy to Neutral in a note this week, citing concerns over the financial impact of its proposed UK merger with Three and challenges in its German business. 

The bank also cut its price target for the stock from 106p to 91p a share.

According to BofA analysts, the merger with Three is “conceptually good” for Vodafone, but the financial strain is “increasingly heavy,” particularly as performance in Germany deteriorates. 

The bank warned that cash flow dilution will be 35% for at least two years, with Vodafone’s cash yield falling below 5%, significantly lower than the sector average of over 7%.

Additionally, dividend cover is seen as tight, meaning Vodafone has little room for further earnings slippage, and there is a growing risk of increased competition in the German mobile market.

Despite these concerns, BofA acknowledged Vodafone’s mid-term recovery potential, noting that dividend growth prospects could improve from FY27 onwards. 

However, the bank cautioned that investors will need to be patient, stating: “While there is an element of being ‘paid to wait’ with 5% dividend and 6% buyback, the wait is now longer and the impact more material.”

Vodafone shares declined 4% in Monday's session, while they have climbed around 0.9% on Tuesday. So far this year, the stock has risen close to 6.7%.