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Is Vodafone Group plc Set For Electrifying Earnings Growth In 2014?

Today I am running the rule over mobile operator Vodafone’s (LSE: VOD) (NASDAQ: VOD.US) earnings outlook for 2014.

Earnings set to come under the cosh

Vodafone remains a casualty of the severe economic and competitive pressures in its key European marketplace, responsible for 70% of group service revenues. The firm’s latest update last month showed that conditions here are worsening, with organic turnover slippage in Northern and Central Europe of 4.9% in July-September, and 15.5% in Southern Europe.

On top of this, the company is facing increasing regulatory pressure on the continent, particularly as the European Commission is becoming more aggressive in its bid to stamp out premium roaming charges by 2016. This scenario could deliver an additional sledgehammer to revenues.

Still, Vodafone is investing heavily to turn around its bleak revenues story. The firm has unleashed its £7bn “Project Spring” organic investment programme to build its 3G and 4G networks, and has been particularly busy in rolling out its next-generation 4G services across Europe in recent months.

Elsewhere, its purchase of Kabel Deutschland earlier this year marks its entry into the highly-lucrative multi-services sphere — covering the television, broadband and telephone markets — in Europe’s largest economy. And further afield, Vodafone is also ploughing the cash into developing its presence in emerging markets, measures which helped drive service revenues in Africa, Middle East and Asia Pacific 5.7% higher during July-September.

As an aside, Vodafone’s appeal as a red-hot takeover candidate, now that it has finally shorn off its Verizon Wireless venture in North America, is expected to hot up next year. US telecoms colossus AT&T is said to be heading the pack, although Latin America’s América Móvil and Japan’s Softbank have also been tipped as potential bidders in recent weeks.

City number crunchers expect Vodafone’s earnings pressure to escalate over the medium term, and have pencilled in a 1% earnings dip, to 15.5p per share, for the year ending March 2014. This is expected to fall a further 28% in the following 12 months to 11.1p.

These figures leave the telecoms giant dealing on P/E readouts of 15 and 21 for these years, shooting above a prospective average of 14.4 for the entire mobile telecommunications space. For short-term investors the prospect of significant earnings woes may prove a massive deterrent, although in my opinion its rapid investment programme could create bountiful rewards over a longer time horizon.

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Despite Vodafone’s poor near-term earnings prospects, the company is still expected to keep its progressive dividend record on track this year and next, lifting last year’s 10.19p per share full-year payout to 10.6p in 2014 and 11p in 2015. If realised, these dividends would carry yields of 4.6% and 4.7% at current prices, comfortably displacing the 3.3% forward average for the FTSE 100.

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> Royston does not own shares in any of the companies mentioned in this article.