Vodafone: Vodafone may have suffered an underlying 2 per cent decline in first-quarter revenue. But that’s not bad in a midst of a deep recession. With a low valuation, good cash generation and a generous dividend yield, the mobile giant’s shares have room to recover further.
Vodafone’s results were smack in line with market expectations. Revenue in central and western Europe was down significantly. Impressive growth in emerging markets driven by the company’s goldmine in India continued to compensate, although its weak Turkish operation remains a major nuisance. The full year outlook was confirmed.
Vodafone is not home free just yet. Mobile phone usage is considered by many analysts to be sensitive to unemployment. With jobless numbers still rising in many of Vodafone’s markets — and expected to remain high for a long time — the company may have to wait some time before underlying revenue starts growing again. But sometimes no news is good news. The mobile giant showed no marked signs of unexpected weakness or market deterioration. Investors who have watched Vodafone lose 20 per cent of its market value this year were clearly relieved.
Given the stable outlook, it is possible now to focus on the attractions of Vodafone as a stock. First, there’s the low valuation – of about seven times forward earnings, a sharp discount to the market.
Then there’s cash generation. In the second quarter, free cash flow was up 21 2 per cent to £1.9 billion. That puts it well on the way to meet its £6-6.5 billion target for the end of the year. And when Verizon Wireless, Vodafone’s US joint venture, starts funnelling dividends back to Vodafone, even more cash will flow into its coffers.
The cash flow, in turn, provides a strong underpinning for the company’s dividend. The current yield of 6.5 per cent looks particularly attractive when interest rates are so low.
