With the VZW sale and return of capital done and dusted, and the prospects of a bid from AT&T retreating into the distance, Vodafone (LSE: VOD) (NASDAQ: VOD.US) is getting boring again. That’s good news for buy-and-hold investors: it’s a great time to put some (more) of this stock in your portfolio. Here’s why:
1. It’s Cheap
Vodafone’s shares have dropped over 17% since the share consolidation in late February. That’s due partly to the bid premium evaporating, and partly to the market’s disappointment at the full-year results announced on Tuesday. Those results are complicated by all the deal-making that has taken place, but the bottom line on Vodafone’s performance was that Europe was dire, whilst emerging markets would have been good but for adverse currency translation. Adjusted EPS dropped 13% to 17.54p, putting the shares on an historic PE multiple of just 11.7.
The market was also underwhelmed by Vodafone’s EBITDA guidance for next year. The company sees a difficult environment for a couple of years whilst it invests to position itself for future growth.
2. A 5.2% yield, and growing
Vodafone increased its full-year payout to 11p, and said it intended to grow the dividend per share. At 206p that’s a generous 5.2% yield, with the expectation that buying in at this price will see the yield-on-cost rising in future years.
Vodafone was traditionally regarded as a high-yielding and solid stock: it could be set to recover that reputation.
3. Safe cash flow
Despite a commitment to £19bn of capital expenditure on Project Spring over the next two years, Vodafone is forecasting to (just) generate positive free cash flow next year, before restructuring costs. From 2019 onwards it sees Project Spring delivering an incremental £1bn of cash flow each year, and says its dividend policy “demonstrates our confidence in strong future cash flow generation.”
That’s a marked improvement on the period before the VZW sale, when Vodafone’s dividend was becoming increasingly reliant on dividends from its US associate. With a strong balance sheet and robust cash flow, the dividend is safe.
4. Right strategy, right place, right time
Vodafone is a cash-rich acquisitor in a European telecoms sector ripe for consolidation and convergence; bundling mobile, land line, broadband and cable TV. It has a strong market position in each of its four growth areas: data, emerging markets, enterprise and unified communications.
European recovery?
Vodafone wrote £7bn off the value of its European businesses, including Germany. I wonder if there’s an element of ‘kitchen sinking’ from CEO Vittorio Colao, knowing that these results are messy and difficult to interpret. The company also recognised £19bn of tax losses in Europe. If revenues in Europe bounce back on stronger economic conditions, they would drop straight through to the bottom line with no tax to pay.