For most shares in the FTSE 100, 2013 was a good year and investors have likely enjoyed capital gains and rising dividend income.
That makes me nervous about investing for 2014 and beyond, and I’m going to work hard to adhere to the first tenet of money management: preserve capital.
To help me avoid losses whilst pursuing gains, I’m examining companies from three important angles:
- Prospects
- Risks
- Valuation
Today, I’m looking at mobile phone and communication specialist Vodafone Group (LSE: VOD) (NASDAQ: VOD. US).
Track record
With the shares at 236p, Vodafone’s market cap. is £114,525 million.
This table summarises the firm’s recent financial record:
| Year to March | 2009 | 2010 | 2011 | 2012 | 2013 |
|---|---|---|---|---|---|
| Revenue (£m) | 41,017 | 44,472 | 45,884 | 46,417 | 44,445 |
| Net cash from operations (£m) | 12,213 | 13,064 | 11,995 | 12,755 | 10,694 |
| Adjusted earnings per share | 17.17p | 16.11p | 16.75p | 14.91p | 15.65p |
| Dividend per share | 7.77p | 8.31p | 8.9p | 9.52p | 10.19p |
1. Prospects
Good progress in emerging markets is countering difficult trading in Europe at Vodafone. The recent half-time results showed a year-on-year decline in earnings per share of 2.6%, but the firm had enough confidence to raise the dividend by 8%.
The company expects proceeds from the sale of its US interests to boost the balance sheet during the first quarter of 2014. Going forward, the directors have clear plans to ramp up capital expenditure to enhance Vodafone’s network and service differentiation globally. Such investment should help the firm accommodate the rapidly increasing demand for data transmission that’s arising due to factors such as escalating smart device usage around the world.
The investment programme is encouraging, as the growth it enables in fast-growing markets should generate the cash flow needed to sustain the firm’s progressive dividend policy.
For 2014 and beyond, I think the dividend is where investors should look for their returns from a Vodafone investment.
2. Risks
Although Vodafone’s emerging-markets business continues to perform well, the trading environment in Europe remains challenging, with what the directors describe as intense macroeconomic, regulatory and competitive pressures. The firm is doing all it can to address the issues, but there is a risk that problems could continue, dragging on profitability.
3. Valuation
Vodafone’s dividend yield for the current year is running at about 4.5% with the dividend covered around one-and-a-half times by earnings. The shares are trading on a P/E rating of around 15.5, which seems like a full valuation.
Looking forward, the sale of Vodafone’s interests in the US will result in a return of funds to shareholders and reduced on-going revenue. When the dust settles after the capital return, investors should look at the dividend to judge Vodafone’s valuation in my view.
