I’ve really not had much idea of the business direction of Vodafone (LSE: VOD) in recent years, with the sale of its Verizon Wireless stake, its patchwork of seemingly unconnected worldwide assets, and its declining 3G business across a moribund Europe.
And a look at Vodafone’s financial indicators only deepens the mystery. With a third straight year of declining earnings forecast, at 209p Vodafone’s shares are on a forward P/E of more than 40!
And at the same time, the forecast dividend yield of 5.4% would have the company paying out more than twice as much in dividends as it’s getting in earnings — and there’s something similar penciled in for the following year.
The future is all about Vodafone’s next generation network, in which it is investing very heavily, and the 20% EPS growth predicted for next year would need to be only the start if the current share valuation is to be justified. But if Vodafone can pull it off it wil be at a major advantage in a recovering European market, and that income stream might actually be reliable.
Strength in insurance
Is the insurance sector undervalued right now? I reckon dividend yields like the 5.4% on offer from Legal & General (LSE: LGEN) strongly suggest it is.
With the recovery in the sector gathering pace, Legal & General has seen three years of 10% EPS growth per year, with something similar predicted for this year and next. Along with that, the annual dividend has been steadily hiked from 4.75p per share in 2010 to 11.25p last year, with 13.3p forecast for 2015. On a share price of around 247p, a further lift in 2016 could see the yield rise to 5.7% — and it comes from shares on a forward P/E of a modest 13.2 and dropping.
First half results were good, with net cash generation up 11% and adjusted EPS up 15%, leading the company to lift its interim dividend by 19%. This looks like a solid and attractive income stream to me.
Cash from investment
A 12-month share price slump of 24% to the end of September has boosted dividend yields from Aberdeen Asset Management (LSE: ADN), and even after October’s 14% recovery to 336p we’re still looking at a potential yield of 5.5% for the year just ended in September, rising to 5.7% on next year’s forecasts.
Earnings are still expected to fall this year and next as the firm deals with a net capital outflow as punters withdraw funds invested in Asia, but with cover at around 1.3 to 1.5 times, the annual cash payout looks safe enough for the next couple of years.