Today I am looking at whether investors should plough their funds into Vodafone (LSE: VOD).
European markets steadily recovering
The recovery over at Vodafone’s critical European operations continues to rattle along nicely thanks to a combination of improving consumer spending power and massive organic investment. The London firm advised last week that “more of our European businesses are returning to growth,” and a 1.5% decline in organic service revenues during April-June indicates the vast strides made over the past year — Vodafone saw European revenues droop 4.7% during the 12 months to March.
The mobile operator’s £19bn Project Spring project to improve its 4G footprint is helping to resuscitate customer demand, and Vodafone’s network now covers three-quarters of Europe versus just 32% less than two years ago. With this huge investment also boosting its retail presence and improving network reliability, continental customers look likely to continue voting with their feet.
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Debts on the rise
Still, in the near term, the costs of Project Spring are casting concerns over Vodafone’s balance sheet. Net debt registered at a colossal £22.3bn as of March, up from £13.7bn in the prior year, with the £5.8bn acquisition of Spanish broadband provider Ono and purchase of various spectrum licences weighing heavily on the firm’s financial health.
Although Vodafone has long spoilt its investors with above-average dividend yields, concerns abound that the London business will subsequently struggle to keep its progressive payout scheme on track. The City currently expects the mobile giant to shell out dividends of 11.6p per share in both 2016 and 2017, yielding an impressive 4.9%. But with rewards expected to continue outstripping projected earnings during this period, many are questioning whether these forecasts are realistic.
Growth levers keep on delivering
However, more bullish investors will point to Vodafone’s terrific growth levers — and subsequently bubbly profits outlook — as a reason for the telecoms leviathan to keep its brilliant dividend policy in place. Firstly its Kabel Deutschland acquisition, and aforementioned purchase of Ono last year, has built a solid base in the multi-services entertainment sphere, while discussions over asset swaps with Liberty Global could bolster its position here further.
And Vodafone’s impressive momentum in emerging regions also promises massive riches. The company saw organic revenues in the Africa, Middle East and Asia Pacific (AMAP) region sprint 6.1% higher during April-June, and insatiable data demand in India — responsible for four-tenths of the regional total — drove revenues here 6.9% higher. Against this bubbly backdrop I fully expect both earnings and dividends to gallop higher in the years ahead.
