Mobile communicationsgiant Vodafone Group (LSE: VOD) has beenone of the most admired income stocks on the FTSE 100 for some years, and rightly so. Its still a top yielder, currently paying a handsome 5.6%, but whatever happened to the growth?
Rites of Spring
Vodafones income isnt just generous, its also rising, with the yield forecast to hit 6.1% by 31 March 2017. However,there are growing worries about the sustainability of that dividend, with coverslipping to a wafer thin 0.4. This is partly due to Project Spring, Vodafonestwo-year investment programme to improve its mobile infrastructure, which has nowsoaked up more 20bn.
The company has nonetheless managed to increase its dividends by around 2% in each of the past two years, and expects to continue doing so over the next couple of years. Thats despite incurringa whopping 5bn first-half loss, mostly due to writedowns in India. Net debt rose to 40.7bnat 30 September, up from 36.9bn on 31 March, reflecting the cost of paying its final dividend. In other words, the income is partlyfunded bydebt, and therefore remains vulnerable. You cant rely on anything these days.
4G or not 4G
ProjectSpring has massivelyexpanded Vodafones 4G and broadband access across the UK and Europe. With the spending splurge out of the way, the rewards should soon start rolling in. Vodafone says its currently beating expectations in key growth markets Germany and Italy. Its alsoEuropes fastest-growing broadband operator.
Vodafone remains a British success story, the largest mobile communications network company in the world. Unfortunately, it isnt a share pricesuccess story,peaking at400p at the height of the technology boom. I sold my shares three years ago at 211p.Today, it trades at 203p.
All about the base
There are signs of hope. In Europe,the4G customer base hassoaredfrom 15m to nearly 40min a year, and because these customers typically use double the data, this should generate greater margins and revenues. Data traffic growth isrobust at 61% across the group. Vodafone is also the fastest-growing broadband provider in Europe, again, boosting revenues and locking in customer loyalty, as will its planned fixed line and pay-TV expansion.
Three years of negative earnings per share growth are forecast to turn positive, with an impressive jump of 39% in the year to 31 March 2017, followed by another 11% the year after. That will lift EPSfrom 5.04p to 7.81p per share in just two years. However, the dividend per share is forecast to be far more than that at 12.37p, so again, the payout isnt covered.
Todays valuation of 40.3 times earnings looks pricey, despite aforecast to drop to 30 times earnings. This hefty valuation may be justified by the fact that Vodafone has poured money into future expansion plans, but it also suggests that meaningful share price growth will remain difficult. The company is also vulnerable to further Eurozone ructions. Vodafonemay struggle to break its recent ceiling of 2.25p but provided it can maintain that5%-plus income, who cares?
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Harvey Jones has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
