I love it when a plan comes together. The Vodafone Group (LSE: VOD) share price has risen by 20% over the last year, as CEO Nick Read has continued to improve the profitability of the business and return it to growth.
Read took a big step forward last week when he completed the listing of Vodafone’s European radio mast business, Vantage Towers, on the Frankfurt Stock Exchange. The Vantage shares sold by Vodafone in the IPO should raise €2.3bn for the group.
With the ISA deadline looming on the 4 April, I’m planning to top up my Stocks and Shares ISA over the coming days. Vodafone is one of the stocks on my list to buy before the end of the tax year. Here’s why.
The trend is your friend
Over the years, I’ve often taken contrarian views on stocks I thought were due a recovery. Sometimes this has worked well, sometimes it hasn’t. But one thing I’ve learned is that the old stock market adage the trend is your friend is generally true.
When I pay attention to the underlying trend, my investments usually move into profit more quickly than when I invest against the trend.
I think that Vodafone shares are showing all the attributes of being in a sustainable upwards trend. Profits are rising, cash flow is improving, and debt is falling. In my experience, this combination usually increases the value of a company’s shares.
A 6% dividend yield
As an income investor, I’m keen to add high-yielding dividend shares to my portfolio. At a share price of 135p, Vodafone stock provides a dividend yield of almost 6%.
This payout has been comfortably covered by the company’s surplus cash in recent years and I don’t see any reason for this to change. In my view, this is probably one of the safest high-yield stocks in the FTSE 100.
Of course, it’s worth asking why Vodafone’s dividend yield is nearly double the FTSE 100 average of 3.1%. I think there are a couple of likely reasons.
Vodafone’s share price: too low or just right?
The first reason for Vodafone’s high yield is the stock’s turnaround status. In recent years, investors haven’t been sure if the company could return to growth and manage its debts. The dividend might have been at risk — indeed, the payout was cut in 2019.
The second reason is that as a large, mature telecoms business, Vodafone faces certain permanent headwinds. Running a mobile network is an expensive business. Vodafone’s capital expenditure budget — money spent on maintaining and upgrading its network — is around €8bn each year.
However, most of the countries where Vodafone operates also have several other networks offering similar services. This competition limits Vodafone’s ability to increase prices and win new customers, leaving profit margins under pressure.
I don’t expect Vodafone’s share price to shoot for the sky. But I think there’s room for further gains from current levels, despite the challenges I’ve discussed above.
I’m also attracted by the opportunity to lock in a 6% dividend yield. Vodafone will stay on my buy list.
