I’m shopping for shares right now, should I pop Vodafone (LSE: VOD) (NASDAQ: VOD.US) into my basket?
The juice on Vodafone
People don’t often turn their noses up at large wads of cash, but investors have been sniffy about Vodafone, even though it dishes out more cash than any other FTSE 100 company. How ungrateful is that? Or does its juicy dividend obscure a dried-up husk of a company? Let’s see.
Invesco Perpetual’s Neil Woodford has been the sniffiest investor of all, severing his connection in February because he doubted Vodafone’s growth and dividend potential. I hung onto my holding, which has since risen 12% to £1.93. Last month, I was glad to see Vodafone on the offensive, making a bid for German cable company Kabel Deutschland, which should generate plenty of cross-selling and cost-cutting opportunities. It has offered €87 a share in cash, which is the sort of thing you can do if you generate as much cash as Vodafone. The new integrated communications operator will throw off even more folding stuff, with £9.8 billion of pro forma revenues in Germany.
African adventure
That said, Vodafone has a mixed track record in Germany, where it overpaid for Mannesman, and could still face a rival bid from cable group Liberty Global. Although Vodafone’s share price has risen strongly since the offer was announced, that is mostly down to wider market sentiment.
When examining FTSE 100 companies, I always look for growth prospects in emerging markets. There is recent good news here, with Vodafone launching two new hubs in a bid to double its African coverage. The challenges of pioneering a mobile phone network in the world’s biggest continent are daunting, but if you’re the size of Vodafone, doable. Small isn’t always beautiful. Plans to offer African-based businesses a single management contract covering multiple territories could further drive growth. Vodafone has also been growing strongly in other emerging markets, notably India, where group service revenues rose 10.7% in 2012, and Turkey, up 17.7%.
Cash in hand
At £1.93, Vodafone is close to its 52-week high of £2. Trading at 12.3 times earnings, it is only a tad cheaper than the FTSE 100 average of 12.9 times. So you aren’t picking up a bargain here (you missed your chance in June). Management is enthusiastically buying back the company’s shares, which should support the share price. But you really buy Vodafone for the yield, which is an irresistible 5.3%, forecast to hit 5.5% in 2015. That compares to 3.55% for the index and 2% for a best buy cash ISA. I’m certainly not turning my nose up at that.
So should I buy Vodafone? Bank of America reckons I should, it has just reiterated its ‘buy’ recommendation with a target price of £2.20. Morgan Stanley, Credit Suisse, JP Morgan and Deutsche Bank are all buyers, so it seems I’m in good company in saying yes, Vodafone is still a buy.
Vodafone isn’t the only great cash generator on the FTSE 100, Motley Fool’s favourite income-stock pick is another. Our analysts have singled out this FTSE 100 favourite because it offers a sky-high yield and great growth prospects. To find out what it is, download our free guide Power up Your Portfolio. It won’t be free forever, so click here now.
> Harvey Jones owns shares in Vodafone. He doesn’t own shares in any other company mentioned in this article. The Motley Fool has recommended shares in Vodafone.
