Everyone has a smartphone. Some 90% of UK contract customers, to be exact, so almost everyone. It remains to be seen if the remaining 10% will upgrade, if at all (it’s not as if smartphones aren’t more attractively priced than ever before).
What, then, does this mean for carriers like Vodafone (LSE: VOD) (NASDAQ: VOD.US)? The main battleground, now that the smartphone market is approaching saturation, is going to be services. Networks will need to differentiate on quality: data speed is one way, while customer service could be another.
Shares in Vodafone trade at 17 times forecast earnings, rising to 28 times in 2015. That doesn’t make Vodafone cheap. That said, if you’re in the market for quality — so well-managed, profitable, safe companies — often it doesn’t matter paying a bit extra. In the long run, if your investment strategy is sound enough, you’ll end up with more winners than losers.
Let’s find out if Vodafone could still be a ‘winner’:
£1bn investment
Vodafone is investing £1bn in its British operations this year and will open 150 new retail outlets. The intention, in the words of UK boss Jeroen Hoencamp, is “to take this company back to growth”.
1,400 new jobs will be created, which will primarily be customer facing roles, making the shopping ‘experience’ more seamless. This, Vodafone hopes, will increase customer loyalty, with advice and maintenance becoming key propositions. If you buy your phone online, for instance, there will be a conveniently located retail store where you can go to get your device set-up.
Another benefit is that Vodafone becomes less dependent on third parties, like Carphone Warehouse, which take a sales cut.
The UK’s best network?
In addition to retail, the speed and quality of Vodafone’s network is paramount. This is important not only to attract new customers — the 10% of contract customers yet to upgrade to smartphones, perhaps — but to keep existing ones.
Here, the noises aren’t quite so positive.
EE, the UK’s biggest mobile operator, came out top in a network test that by RootMetrics which ranked reliability, voice, data and text services. Vodafone came dead last. “It’s not good enough,” in the words of Hoencamp, and the £1bn investment in the UK should redress woes in this area. Vodafone believe that their network will become, arguably, the UK’s best.
In a move that could pose a threat to Sky, Vodafone is teaming up with Netflix to launch a film and TV service for smartphones, which could potentially lure new customers.
Income, growth or both?
Shares in Vodafone, even post-Verizon, still provide a hefty income packet. At the current share price, Vodafone yields an impressive 5.2%. But the rate of dividend growth is slowing. Between 2014 and 2015 analysts project the dividend will increase from 11p to 11.6p. That’s a 5.5% change, which is the smallest increase in five years, and the cover is just 0.7 times earnings.
Perhaps that might make you reassess Vodafone’s position in your dividend portfolio.
