Why The Negativity Over Vodafone?
- Vodafone is a high yield company that released its 2018 Full Year Results on the 15th May
- You can buy shares under ticker VOD.L in the UK and VOD in the USA
- The company has grown its dividend for 18 years in a row
- With a dividend of 0.1507 Euros (£0.13), the dividend yield is 6.65% based on the current share price of £1.95
Since Vodafone’s humble beginnings in 1985, it has become a juggernaut in the telecoms sector and is the second largest in the world behind only China Mobile, when going by the user subscription figures. The company operates in over 30 companies and partner with over networks in over 50 more. They were eve responsible for enabling the world’s first international mobile roaming call in 1991!
Company Strategic Focus
During the past 10 years under the watchful eye of Vodafone’s 4th CEO, Vittorio Colao, he has focused on improving synergies within the business, spinning off assets & exiting from the USA market, then using the capital to make key-acquisitions like the 1 announced last week, significantly bolstering its position in Germany and eastern Europe.
One negative was Vodafone’s India service, which saw revenue decline by 18.7% and EBITDA by 34.5%. Due to the upcoming merger with Idea Cellular, the figures were excluded from Vodafone’s Group income statement.
The merger should result in cost synergies that’ll improve the profit margins providing a further boost to the company’s bottom line net income. Another benefit though completely separate is that Vodafone agreed to a merger between Indus Towers and Bharti Infratel, and since Vodafone owned a 42% stake in Indus Towers, it now has a co-controlling stake in India’s largest listed tower company.
So why the negativity?
It was announced that CEO Vitorrio Colao will be standing down and that the current CFO Nick Read will be his successor, but does he share Mr Colao’s vision? This is what has caused the uncertainty in the markets. Mr Read definitely has the expertise since he has been in the company since 2001 as the UK Finance Director, and then the CEO of Vodafone’s UK division, being promoted to Vodafone’s CFO in 2014.
After reading the Transcription of the Conference Call, I’m happy with how he handled himself when answering the majority of the questions. His mindset seems to be similar to that of Mr Colao’s in terms of focusing on cutting costs and increasing margins. He also had a firm grasp of the problems they’re currently facing in Spain & Italy, as increased competition most likely means a reduction in pricing.
Vodafone Group’s revenue saw a 2.2% decline but saw a 15.4% increase in operating profit, exceeding the companies previous guidance of 10% organic growth in EBITDA. Free cash flow also saw a huge 34% increase, solidifying that the dividend payout is safe.
Free cash flow for the company came to 5,417 million euros, and with the dividends costing 3,920 million euros, we have a payout ratio of 72.36%. Now for an investor who focuses on dividend growth, this would be a little worrying as it highlights the fact that the company has little remaining free cash to spend on further dividend increases, and the company would need to continue growing to sustain that. To prove this point the company announced an increase in the dividend by 2% to 15.07 euro cents.
The company has 14.1 billion euros in cash and short-term investments which could be used for further acquisitions around eastern Europe and Asia.
images provided by dividenddata.co.uk
The company currently trades at a multiple of 10.85x its current free cash flow per share of £0.18. From a valuation standpoint, this is cheap as you’re buying the company’s free cash flow at a return of 9.22%, also the dividend yield of 6.65% is historically high for the company as its average yield is closer to 5%.
Investors should lower their expectations if they decide to buy telecom companies such as Vodafone since most of its cash will be spent on CapEx to invest in its infrastructure. These companies tend to operate like utilities and therefore usually underperform the market. If you are investing for the dividend, you should expect little movement in terms of your capital growing, but a nice yield on your investment that hopefully rises with inflation.
If you’re a UK investor this would be a great addition to your Stocks & Shares ISA if your main focus is on high yield stocks, especially a well known large-cap company such as Vodafone that is a leader within many of its respective markets.
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