When I think of mobile phone and communication specialist Vodafone Group (LSE: VOD) (NASDAQ: VOD. US), two factors jump out at me as the firm’s greatest strengths and top the list of what makes the company attractive as an investment proposition.
1) Expansion in emerging markets
Now that Vodafone has sold its American assets, we can categorise the majority of the firm’s operations as those in Europe and those in emerging markets. The recent full-year results show that Europe delivered around 64% of Vodafone’s earnings last year, down 10%. The rest came from the emerging markets of Africa, the Middle East and the Asia Pacific, where collective earnings are up 10% on the year-ago figure. It’s something of a well-worn statement these days, but emerging markets continue to follow a long-term fast-growing trend for just about all firms operating in them.
Growth around 10% is exciting and implies that emerging markets could easily constitute more than 50% of Vodafone’s business within five years, should the rate of expansion continue. If that happens, lacklustre performance in Europe will have less impact on the firm’s future overall financial results.
2) Turnaround potential in Europe
The CEO reckons headwinds in Europe include competition and regulatory and macroeconomic factors, but the firm is fighting back with an investment programme designed to enhance the company’s networks. By ratcheting up network and service differentiation, Vodafone hopes to become the provider of choice for customers that it predicts will have ever-increasing data requirements.
Vodafone expects the economic environment in Europe to recover and reckons the focus of regulation is showing some early signs of acknowledging the need to promote investment in the sector and permit consolidation. Such assumptions seem to underpin the firm’s investment strategy.
Rolling out wider 4G coverage in Europe and 3D coverage in emerging markets will take cash, the CEO warns, but that won’t affect the firm’s dividend payment. That seems reasonable, as it’s only by keeping up with investment programmes that companies can make sure that future cash flows remain strong: speculate first, accumulate second. If Vodafone’s capital investments can stabilise forward profits in Europe and keep earnings growing in emerging areas, the overall result looks like being satisfactory for Vodafone shareholders.
What now?
Vodafone’s forward dividend yield is running at about 5.4% for 2016, which should keep investors warm as they wait for the effects of Vodafone’s investment strategy to drive up future cash flow, as the firm’s CEO thinks it will.