Why You Should Let Vodafone Group plc Look After Your Money

Vodafone Group plc (LON:VOD) now has to make all the right calls, or risk being just another (very average) mobile provider.

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If, by the time you have finished reading this piece (around 4-5 minutes from now), you’re thoroughly confused, then I haven’t done my job. What I’d like to flesh out briefly here are the reasons you would hold Vodafone (LSE: VOD) (NASDAQ: VOD.US) as an investment.

This is a tricky stock pick because Vodafone’s future is not certain. That said, it does present some attractive features for investors.

It’s a solid company

Vodafone produced income of £59.25 billion over the past 12 months. That’s not too dissimilar from rival Virgin Mobile. The mobile phone company, though, has struggled on the revenue side (largely due to market saturation). Despite that, it’s managed a net profit margin of around 30% (that’s better what Virgin Mobile could squeeze out). Vodafone also knows a thing or two about working its assets. Its ROA is around 8.5% (Virgin — at 5% ROA — has to work up a little more sweat for the same output). Vodafone also kicked a goal with its recent dividend payout. Its DPS is a little over 11p, pulling a yield of around 5.5%. On those metrics alone you’d be looking seriously at the stock as a possible income play (if holding a large parcel off shares).

It has problems

Don’t they all!

Seriously, though, who do you know who doesn’t have a mobile phone? Anyone?! I was a late-comer to the party. I only got around to buying one in 2001 — but that was over a decade ago. Mobile’s aren’t like landlines, either — they have a relatively limited life. That would work well if the market consisted of just Vodafone and Virgin Mobile. The reality, though, is that there are quite a few players. Analysts say the market is literally close to a saturation point.

So with that in mind, here’s a critical medium-term problem for the company: it’ll find it hard to differentiate itself from its competitors because they all basically sell the same thing, and like many of Britain’s big supermarkets, Vodafone is being undercut by the smaller competitors in the market.

In recent years, Vodafone has also copped quite a bit of bad press ‘Down Under’ for poor customer service and an inadequate network (which it has since tried to rectify). It’s also grappling with shrinking service revenue from its main European markets.

It’s looking for answers

Vodafone has cash, and there are expectations it’s going to become quite aggressive in its marketing. It’s an ‘old fashioned’ but potentially effective market penetration strategy.

It’s also trying to make direct contact with customers. Last week the mobile phone company announced it had agreed to buy 140 Phones 4U stores. It’ll likely use this as a channel to sign up more customers onto contracts.

What’s important to know is that Vodafone, as it stands, is currently shedding assets rather than building them. A case in point is the disposal of its 45% stake in Verizon Wireless. But the firm is also on the lookout for the ‘right kind’ of investment. This year alone the group increased its cash reserves by $2.61 billion. It’s estimated that Vodafone may have between £10 billion and £15 billion pounds of capacity for deals.

Bottom line, you ask? Well, it’s a solid company but it’s got some daunting challenges ahead of it. It’s going to have to win over customers and make the right sort of investments moving forward. I suspect if it can’t offer a superior alternative to its rivals, and make customers want that alternative, it’ll keep sinking ever so slowly.

For now, it’s okay.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

David does not own shares in Vodafone.

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