FTSE 100 7% yielder Vodafone’s share price keeps falling. Time to buy?

Roland Head explains why he’d buy into the weakness at FTSE 100 (INDEXFTSE:UKX) firm Vodafone Group plc (LON:VOD).

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Telecoms giant Vodafone Group (LSE: VOD) is one of the highest-yielding stocks in the FTSE 100, with a forecast dividend yield of 7%.

Vodafone’s share price has fallen by about 20% so far this year, but the group’s recent results gave me confidence in the outlook for shareholders. Although the planned departure of respected chief executive Vittorio Colao is a risk, I think the shares could be good value at current levels.

Follow the cash

After a long period of investment in upgrading its network, Vodafone’s earnings are finally starting to recover. Adjusted earnings rose by 44% to 11.6 euro cents per share last year, while adjusted operating profit climbed 22% to €4.8bn.

But what really grabbed my attention was the group’s free cash flow. Excluding spectrum payments, it rose by 34% to €5.4bn last year. This has left the stock trading on a price/free cash flow ratio of just 10.3.

This free cash flow was also enough to comfortably cover last year’s dividend of 15.07 cents per share, which totalled €4,020m. Even when spectrum payments were included, the group’s free cash flow of €4,044m still covered the shareholder payout.

Net debt was almost unchanged at €31.5bn last year, providing further confirmation that the dividend was funded with surplus cash, not borrowed money.

Why I’d buy

Vodafone’s strong cash generation is expected to continue this year. The firm’s guidance is for free cash flow excluding spectrum payments of €5.2bn. Although the dividend still won’t be covered by earnings, I believe this cash figure should mean that the payout remains safe.

Investment in 4G technology and fibre networks is now helping the firm to return to growth. The group should be well positioned to become a European leader in converged data services, which switch seamlessly between broadband and mobile.

For income investors, I believe Vodafone’s forecast dividend yield of 7% is a good long-term buying opportunity.

A cash cow I’d buy today

Home and motor insurance firm Admiral Group (LSE: ADM) has become famous among investors for its generous dividends. The group is often able to pay out all of its earnings to shareholders, thanks to its unusual business model.

Many of the group’s policies are co-insured or reinsured with other big insurance firms. This means that in return for a fixed fee, the other insurer will take some or all of the risk in the event of a claim.

A second area of strength is the group’s conservative claims reserving policy. Insurance companies set aside a certain amount of cash each year to settle claims. Any money that’s left over can be released from these reserves and is typically returned to shareholders. By reserving carefully, insurers are able to return surplus capital from the previous year to shareholders. This is one of the main sources of cash for Admiral’s special dividends.

Super profits

Strong management and a clever business model have made the Cardiff-based firm one of the most profitable insurers in the UK. Admiral generated a return on equity of 55% last year, compared to 17% for Direct Line and 22% for Hastings Group.

The shares currently trade on 15.6 times forecast earnings and offer a prospective yield of 6.3%. In my view this is too cheap to ignore. I rate Admiral as a long-term income buy.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Roland Head has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Young Caucasian man making doubtful face at camera
Investing Articles

Surprise! This monopoly stock has taken over my Stocks and Shares ISA (again)

Our writer has a (nice) dilemma in his Stocks and Shares ISA portfolio after one incredible growth stock rocketed higher…

Read more »

Investing Articles

10.5% yield – but could the abrdn share price get even cheaper?

Christopher Ruane sees some things to like about the current abrdn share price. But will that be enough to overcome…

Read more »

Investing Articles

£9,000 to invest? These 3 high-yield shares could deliver a £657 annual passive income

The high yields on these dividend shares sail sit well above the FTSE 100 average of 3.6%. Here's why I…

Read more »

Surprised Black girl holding teddy bear toy on Christmas
Investing Articles

I’ve got £2k and I’m on the hunt for cheap shares to buy in December

Harvey Jones finally has some cash in his trading account and is hunting for cheap shares to buy next month.…

Read more »

Investing Articles

Down 25% with a 4.32% yield and P/E of 8.6! Is this my best second income stock or worst?

Harvey Jones bought GSK shares hoping to bag a solid second income stream while nailing down steady share price growth…

Read more »

Investing Articles

Here’s how the Legal & General dividend yield could ultimately hit 15%!

The Legal & General dividend yield is already among the best of any FTSE 100 share. Christopher Ruane explores some…

Read more »

Investing Articles

Is December a good time for me to buy UK shares?

This writer is weighing up which shares to buy for his portfolio next month, and one household name from the…

Read more »

Investing Articles

Is it time to dump my Lloyds shares and never look back?

Harvey Jones was chuffed with his Lloyds shares but recent events have made him rethink his entire decision to go…

Read more »