With the Smartphone rage at an all-time high, it would not be a bad idea to take a look at the carriers we can cash in with the rise in the smartphone frenzy across the globe. Here we will shift our focus from mainland U.S. and take a look at the niche player of the world. The stocks of this player are substantially down owing to the sluggish European economy and the ongoing market correction. But due to its strong presence in the emerging markets and solid cash flow and firm fundamentals, the company is worth considering for investment options.
By now all the readers must be frantically searching for the name of the company, well to give away the suspense we are talking about Vodafone PLCĂ‚ (VOD, Financial). Let us take a closer look at its investment opportunities.
Current stats
Vodafone is a UK-based telecom giant with the core of its business in Europe but also shares a strong hold in emerging markets alongside the local players. It is the number two telecommunications provider in Germany, the UK and a number of other emerging markets. The latest downward movement brought Vodafone below $30 per ADR share, and as of today the shares now stand at $30.48 which is quite an attractive value for a company of its caliber.
Towards the end of 2013 Vodafone sold out its stakes in Verizon Wireless (VZ, Financial). The move managed to save the face of Vodafone’s group revenue numbers that have been on their way downhill and the downward trend still continues.
Since the time the European economy has gone into a dilly dally situation with the big economies like Germany entering into crisis, the Vodafone business has been quite murky. The situation is such that while the emerging markets generate considerable revenue but the positives get heavily overshadowed by the poor performance in their home turf.
We can divide Vodafone’s core geographic area into two halves – South and North Europe. South Europe would include Italy, Spain and Greece, which have been the main drivers of the European economy downhill and are also a red zone for Vodafone and for that matter any other business. North Europe holds two of Vodafone’s strong hold – UK and Germany but even these economies are on their slide downwards after being burdened by the crashes of Southern Europe. Hence even though the north European turfs are somewhat in the green for Vodafone than the south but overall it is in a downtrend which is taking the toll on Vodafone’s performance heavily.
The above chart represents German operations. We can see continued declines due to increased pricing competition and a stagnant economy. Though lately revenue service declines have been arrested to some extent and the magnitude of revenue loss is narrowing, at the current rate of recovery it would take a long time to scale back to even term.
In the UK, we see a similar pattern of shrinking but recovering revenue. As with Germany, in the UK it will take Vodafone awhile to return to growth.
Vodafone in action
For Vodafone to return to substantial growth, Europe as a whole will have to recover. Unfortunately, there is no indication in sight of Europe recovering in the near future; as a result Vodafone’s woes continue to haunt the company. However, there are some secular growth trends which are being reported due to which there is an upscale happening in the earnings of the telecom giant.
- Mobile data traffic in Europe is on the rise. Meanwhile, Vodafone is restructuring its infrastructure from just a provider of prepaid voice and text to a provider of post-paid voice and data. Project Spring, Vodafone's multi-billion dollar project to build out both broadband and 4G networks across Europe, has resulted in 52% data coverage in Europe which is quite an encouraging number. Vodafone management stated that only one fourth of Project Spring has been completed which accounts for 52% of the continent, hence ones completed it would mean a total Europe coverage for enhanced voice and data communication system.
- In the emerging markets, particularly India, Turkey and Ghana, the subscriber base is on the rise which will generate more revenue for the company. In fact, many people in these countries are shifting from fixed line connectivity to 3G mobile connectivity. For example, daily data traffic on Vodafone's India network has more than doubled since just the latter half of 2012. Service revenue growth in India has grown by 11.9% year on year as of the last semiannual report.
- Average Revenue per User, or ARPU, which is a very important metric for telecommunications companies, is benefiting from the move to post-paid, fixed data use. For example, 4G ARPU in the UK has seen an upside by 18%, and in the Netherlands 4G ARPU has moved up by 12%. Therefore, the migration to mobile data, especially to 4G, should eventually deliver ARPU expansion.
Dividend payout
Going by Google Finance (GOOG, Financial), Vodafone's ADR dividend payout stands at 7.7%, and Yahoo finance (YHOO, Financial) says 8.3%; however, neither is correct. Unlike U.S. companies paying dividends quarterly Vodafone pays dividend biannually.
This year, Vodafone's net dividend, after surcharge deductions, came out to $1.82 per ADR share which is about 6% of yield which does not look very attractive.
Over the last twelve months, Vodafone has paid out $8.6 billion in dividends. Over the same period, the company earned $10 billion in operating cash flow. Hence the payout ratio stands at 85.85%.
Vodafone pumped in $10 billion in capital expenditure towards funding its flagship project, Project Spring, an amount considerably higher than last year’s $3 billion. Most of the fund has been acquired from the Verizon Wireless deal.
Another clever move of Vodafone management is share buyback. Through the last twelve months Vodafone has spent $24.6 billion in buyback deals. This helps Vodafone downsize its dividend obligations while keeping the dividend payout amount intact. Hence even with declining revenue the dividend payout is quite unaffected.
Major takeaway
There is no doubt that Vodafone is sailing through rough waters due to the disappointing macroeconomic situation in Europe. However with a rise in data revenue, improving ARPU, strengthening of its foothold in the emerging markets and the Project Spring under way the company shows great fundamental strength in the business. To top it off, the share buyback strategy should downsize its dividend payout budget by a considerable amount. This should be encouraging enough to draw long-term investors to own a stake in the British telecom giant. Hence from my point of view Vodafone is a strong buy and hold.
