Don’t buy Vodafone shares – here’s why

According to brokers at Investec, and the Telegraph’s Questor, investors should be piling into Vodafone (LSE: VOD) as a “strong buy”. But I’m not so sure.

Many analysts have jumped on the unveiling of Vodafone 360 – the new internet service, says Questor. This tool will allow users “to merge their phone and email contacts with online social networking details”. Apparently some analysts were “breathless with excitement” over this.

Am I missing something here? All this means is that your mate’s contact details will now appear with a Twitter feed and a Facebook status update, along with the usual phone number and email address. That’s fine, but it’s unclear how all this clever connectivity will be turned into profits. Moreover, says Questor, Vodafone’s strength is that it will launch the service to a “captive audience of 100m customers”. But they’re hardly a captive audience – 159,000 of them in the UK defected to rivals last quarter.

The other big selling point for Vodafone and telecoms in general, is growth in emerging markets. But here Vodafone is “selling £10 notes for £9”, as Sir Alan Sugar might put it. In a bid to win market share at any price, the firm boasts of signing up 2m new Indian customers a month. Great. But as Questor points out, “its task is to turn these into profitable customers”. Until it does so, these customers are a burden, not a boon.

Finally, there’s the excitement over the hugely successful Apple iPhone. Vodafone has managed to secure a deal to sell these phones. That means it’s avoided being left out in the cold by rivals O2 and Orange, but it’s also likely to mean a huge price war. So Vodafone may slow the exodus of Western customers, but at what cost to its bottom line?

Vodafone might be yielding 5.6% – but it’ll be tough to keep that dividend growing with profitability likely to remain under pressure for the foreseeable future. If you’re looking for more attractive high-yielding plays, there are better bets in the FTSE 100 in both the oil and utilities sectors.