The FTSE 100 achieved one of its best performances on record last year. However, despite this achievement, there are still plenty of bargains available in the index for investors to snap up today. Especially when it comes to income investments.
Top income stock
One of the index’s best income stock is telecommunications group Vodafone (LSE: VOD). At the time of writing, this stock supports a dividend yield of 5.1%, significantly above the FTSE 100 average of 3.4%.
For the past few years, Vodafone has been struggling. The company’s revenue growth has stagnated and debt has risen. The group is spending more on developing its infrastructure as well as paying for spectrum rights around the world to keep up with the competition.
And Vodafone India, once considered to be the jewel in its global empire, is now worth nothing.
But despite all of the above, it seems as if the group is making progress. Vodafone is exiting non-core markets and using money received from sales to pay down debt.
In the company’s latest sale, it sold its 55% stake in Vodafone Egypt for $2.4bn to Saudi Telecom. With 44m subscribers and a 40% market share, Vodafone Egypt is the country’s biggest mobile operator.
Market share
Instead, Vodafone’s management has decided to concentrate efforts on growing its market share in Europe. It already has a strong European presence, and recently boosted its footprint after buying a collection of assets from Liberty Global. It’s expected that the integration of these assets will yield annual cost savings of €500m. That will also help boost earnings and reduce debt.
Analysts believe the company’s net debt to earnings before interest, tax, depreciation and amortisation (EBITDA) ratio will decline to around three times this year. That’s good progress, but it still leaves Vodafone with a mountain of obligations.
The group is also planning to divest its mobile towers business in 2021, which will reduce debt further. Borrowing could fall to 2.5 times EBITDA, according to the City.
Attractive income investment
If the company meets the above debt reduction targets, it looks like an attractive income investment at current levels. The stock is highly cash generative, and if management can get borrowing under control, this removes the key headwind to group growth.
Vodafone can then use its size and European scale to offer a high level of service that’ll leave most competitors trailing in its wake.
At the time of writing, the stock is trading at a price-to-free-cash-flow ratio of just 7.5. The rest of the industry is trading at a price-to-free-cash-flow multiple of 16. On this basis, it looks as if shares in Vodafone offer a wide margin of safety at current levels. There’s also that 5.1% dividend yield for income investors.
As such, it looks as if now could be the time to take advantage of this attractive opportunity.
