The last three months have been fairly positive for investors in Vodafone (LSE: VOD) (NASDAQ: VOD.US). That’s because shares in the telecommunications company have risen by 3.5%, which is well ahead of the FTSE 100’s 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%+. Here’s why.
A New Strategy
The sale of Vodafone’s 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 Vodafone’s strategy has become clear: buy high quality European assets at bargain basement prices.
For instance, Vodafone has purchased Kabel Deutschland and Spain’s 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, Vodafone’s 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 it’s at the right price. If it does come off, the deal could help to boost Vodafone’s 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 Vodafone’s yield settles at a still hugely attractive 5% over the medium term, this would equate to a share price of around 227p.
That’s 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.
