I’ve been unimpressed by Vodafone Group (LSE: VOD) for some time, seeing its shares as being overvalued. But two key things have happened since I last voiced my doubts.
The share price weakness has continued, and since the start of 2018 we’ve seen a 14% drop to 203p.
We’ve also seen the City’s analysts stepping up their growth forecasts. With earnings per share having started to tentatively turn upwards again in the last two years, there’s now a 24% rise on the cards for the year ending March 2018.
Attractive valuation
That still gives us a high-ish P/E multiple of nearly 23. But further double-digit growth forecasts for the next two years would drop that to around 17.5 by 2020, and I’m starting to see that as attractive.
I’m also becoming less cautious of what I saw as a disjointed global strategy, and it’s probably an inevitable feature of an international company where different parts of the world are at very different stages of development. Simply having a decent presence in each market might actually be what’s needed.
The trend in Vodafone’s markets was reinforced in February’s Q3 update, which showed a continuing decline in general service revenues, but steady growth in data services. The company reported “sustained data growth of 61%” together with a net 379,000 new broadband additions. Full-year adjusted EBITDA is expected to come in around 10% ahead of last year.
Protecting the skies
The Internet of Things (IoT) is surely going to be a big money-spinner, and it’s barely got started yet. Couple it with the increasing use of those flying drone things and the dangers they can bring, and there’s an opportunity that’s ripe for the picking.
On Tuesday Vodafone announced “trials of the world’s first air traffic control drone tracking and safety technology,” aimed at rectifying the problem that drones are too small to be tracked by radar around airports and other sensitive locations where they pose an increasing hazard.
The idea is that, in accordance with the European Aviation Safety Agency’s future rules, drones should be equipped with a Radio Positioning System (RPS) based on a 4G SIM. It would enable real-time tracking, the setting up of predetermined exclusion zones, and emergency intervention from relevant authorities among other features. Vodafone says RPS data is more secure and harder to hack than GPS.
The power of cash
Also this month, Vodafone confirmed it is in “early stage discussions with Liberty Global” regarding the possible acquisition of some European assets, although suggestions of a merger of the two companies were dismissed. Bit-by-bit consolidation of assets in key markets like this is not spectacular, but it continually strengthens Vodafone’s presence.
I am still disturbed by Vodafone’s dividend policy, and the interim payment was again lifted “consistent with the board’s intention to grow the full-year dividend per share annually.” While that strategy will keep the income seekers on board, I really don’t think it’s the best use of cash for a company whose EPS doesn’t come close to covering the cash and which was sitting on net debt of €32bn at the interim stage.
Still, earnings should come close to cover by 2020, and presumably the company expects to be in positive territory before too long. Overall, I think Vodafone is in for a strong decade, but be prepared for a possible dividend cut.
