The last three months have been fairly positive for investors in Vodafone (LSE: VOD) (NASDAQ: VOD.US). Thats because shares in the telecommunications company have risen by 3.5%, which is well ahead of the FTSE 100s fall of 0.5%. However, there could be much more to come especially in the long run and Vodafone could deliver a total return of 20%+. Heres why.
A New Strategy
The sale of Vodafones stake in North American operator, Verizon Wireless, earlier this year was met with surprise by many investors. After all, it was a highly profitable entity and seemed to have a bright future. However, since then Vodafones strategy has become clear: buy high quality European assets at bargain basement prices.
For instance, Vodafone has purchased Kabel Deutschland and Spains Ono for over 17 billion in total during the last year. While it could take time for such purchases to come good, as a result of a European economy that continues to post anaemic levels of growth, it seems to be a very sound long-term strategy.
Further Acquisitions
As reported recently, Vodafones CEO Vittorio Colao has not ruled out further major acquisitions. Indeed, cable operator (and competitor) Liberty Global is being mooted as a potential takeover target for Vodafone. This would give the company further exposure to Europe and seems to be a logical step for the company to make, so long as its at the right price. If it does come off, the deal could help to boost Vodafones long-term earnings growth yet further and put the business on an even more attractive path to growth.
Income Prospects
At present, Vodafone yields a very attractive 5.6%. This is among the highest yields on the FTSE 100 and shows that the company remains a favourite play among income-seeking investors. However, with UK interest rates set to rise at only a gradual pace over the medium term and looking likely to settle in the 2% 3% range, dividends could become an even more important asset for investors moving forward.
As such, it would be of little surprise for stocks such as Vodafone, that offer a high yield and come with a sound, long term growth strategy, to see their shares bid up in price. In other words, a 5.6% yield is unlikely to remain so high due to increased demand for income by investors. After all, the FTSE 100 yields just 3.2% at present, so assuming Vodafones yield settles at a still hugely attractive 5% over the medium term, this would equate to a share price of around 227p.
Thats 12% higher than the current share price and, with a yield of 5.6%, could equate to a total return of 20%+ over the medium term. Certainly, there will be some lumps and bumps ahead for Vodafone, as the Eurozone experiences a challenging recovery. However, with a sound strategy and a generous yield, Vodafone could prove to be a popular (and profitable) stock moving forward.
Your Portfolio
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Peter Stephens has no position in any 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.
