I’m eyeing up two FTSE 100 shares that seem worlds apart, despite both being in the telecoms sector.
The first is Airtel Africa (LSE:AAF), which yields a fairly puny 3.6%. Then, there’s Vodafone (LSE:VOD), which pays out a hefty 11.3%. That would seem to be a big point in Vodafone’s favour right out of the gate.
But let’s dive further into both of the options before drawing any conclusions.
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Faster than a cheetah
Airtel Africa, with operations across 14 African nations, is a fast-growth player in the telecoms and mobile money sector.
Mobile money services allow people in low-resource countries without bank accounts to deposit, transfer, and receive cash using just their phones.
The company’s growth narrative is underpinned by a significant increase in its customer base, fuelled by the expansion in mobile data and mobile money services.
Airtel Africa reported an eye-popping revenue increase of 17.6% in constant currency and an EBITDA increase of 17.3% in the year ending 31 March 2023.
These figures indicate robust operational health and suggest potential for sustained growth and dividend payouts. Of course, the volatility of the developing market currencies in which the company earns relative to the pound is a big risk to keep in mind for UK-based investors.
Slow and steady
Vodafone is a well-established entity with a network spanning 17 countries and stakes in five more, with its operations largely concentrated in European markets.
This extensive reach, however, hasn’t shielded it from financial headwinds.
The company saw a modest revenue growth of 2.7% and a decline in EBITDA in the financial year ending 2023.
Additionally, it faced competitive pressures and operational challenges, particularly in key markets like Germany.
Vodafone’s high debt level, combined with these issues, casts a shadow on the sustainability of its high dividend yield. Could a dividend cut be on the way, given its debt-to-equity ratio is 110%, compared to the telecoms sector average of 80%?
Value or growth?
Vodafone’s valuation metrics, including a rock-bottom price-to-earnings (P/E) ratio of 2.26 and a price-to-sales (P/S) ratio of 0.59, make the stock look like a bargain.
However, the operational and financial challenges make me cautious.
In contrast, Airtel Africa’s P/E ratio of 18 is backed by demonstrated lightning-fast growth rates.
Beyond the numbers, there’s a broader context to consider. Airtel Africa is a leader in a market with huge, long-term, growth potential. Africa’s telecommunications sector is rapidly expanding, driven by an increasing population and growing digital adoption.
This context provides a backdrop for Airtel Africa’s growth story, making its higher valuation metrics easier to swallow.
In comparison, Vodafone’s challenges are more pronounced in its mature markets. The competitive landscape in Europe, coupled with operational inefficiencies, have put pressure on its growth and profitability.
While Vodafone has made efforts to streamline operations and reduce costs, these measures may take time to reflect in improved financial performance.
I plan to add a small position in Airtel Africa to my portfolio when I next have spare cash to deploy.
Vodafone, despite its high dividend yield, seems less promising to me due to its stubborn financial and operational challenges.
