For a while now I have been eyeing a FTSE 100 share selling for pennies. It has a huge customer base, well-known brand and one of the highest yields of any FTSE share, at over 10%.
Here is why I invested – and what made me decide that now is the moment to act.
Attractive business characteristics
The share in question is Vodafone (LSE: VOD).
As a business, Vodafone needs little introduction. That is part of what I like about it. A well-known brand and longstanding presence in many markets means that the company is able to tap into heavy demand for mobile and data services.
Indeed, over time, I expect such demand to grow. Some of the markets in which Vodafone operates, such as some African countries, look set to grow at a sharp clip in coming years.
With a customer base already running into the hundreds of millions, all of that looks like good news for Vodafone.
Some risks
However, I was previously a shareholder in the FTSE 100 company and decided to sell my stake due to some of the risks.
Telecoms can be a costly business. Companies need to pay for licenses, build vast infrastructural networks and maintain them. That can require heavy capital expenditure.
That helps explain why, for some years, Vodafone has been carrying a heavy debt load. The risk that that could lead to a dividend cut led me to sell my shares before.
Right valuation
So what changed to tempt me back into the shares this week?
For one, the debt load has been cut sharply. It is still high, at €33bn, but fell 20% over the course of last year. I therefore think things are moving in the right direction.
On top of that, a fairly upbeat trading statement this week in which the company reiterated its full-year guidance made me think that Vodafone is making progress in improving business performance and capitalising on its potential.
I have been waiting for Vodafone to demonstrate its business performance is going in the right direction and I feel the trading statement did that.
There are still risks but I feel they are already reflected in the share price. So this week I made a move and bought the shares once more for my portfolio. I see the current valuation as attractive.
What next?
The net debt could yet lead the company to cut its dividend. But with a 10.2% yield, even if the company cuts its dividend it could still be attractive. If the shareholder payout is maintained, the yield is among the highest offered by any FTSE 100 share.
On top of that, I see potential for a share price gain if the business performs well. The shares have fallen 58% in five years but the business opportunities remain substantial.
I am therefore optimistic that, over the long term, the share price could move up.
