Vodafone (LSE: VOD) (NASDAQ: VOD.US) is a company that I have recently been bearish about.
Indeed, I have been highly critical on Fool.co.uk about its recent decision to sell what I viewed as its ‘crown jewel’, the 45% stake in Verizon Wireless. I couldn’t understand the sale and did not see the value in simply returning the bulk of cash from the deal to shareholders.
However, I’ve put my concerns about Verizon Wireless to one side and, instead of looking three months ahead, am now looking three years ahead. As a result, I’m bullish on Vodafone’s prospects.
The main reason for this is the exceptionally strong cash flow that Vodafone, a mature company operating in a mature market, has at its disposal. Indeed, the strength of this cash flow can be seen when assessing the value of Vodafone’s shares using the price-to-free cash flow (P/FCF) method, with Vodafone’s P/FCF being an impressive 5.8%.
This highlights the attractive valuation that Vodafone currently trades on, with free cash flow also being relatively consistent and stable due to the diversity and range of regions and products that Vodafone operates and sells in.
Furthermore, I’m also aware that market sentiment has been strong towards Vodafone and it would be of little surprise to me if this were to continue into 2014. The Verizon Wireless deal optimism should run through the first quarter of 2014 so I would expect the share price to be buoyed by this deal and by any potential acquisitions made by Vodafone.
Of course, a major attraction of Vodafone is its yield, which is currently 4.7%. This is favourable when compared to the wider FTSE 100, which has a yield of 3.5% and shows that Vodafone remains a great yield play for income-seeking investors — especially when bank savings rates are so low and inflation is a constant hurdle to overcome.
So, I’ve changed my stance on Vodafone having looked at the medium to long term (rather than the short term) and focused on the strong free cash flow of the business, which is best highlighted by an impressive P/FCF ratio. In addition, market sentiment should remain positive in the short to medium term, while an impressive yield is great news for income-seeking investors like me.