Why I’m Still Holding Vodafone Group Plc

Shares in Vodafone Group plc (LON:VOD) are near five-year highs, but there could be more to come.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Shares in Vodafone (LSE: VOD) (NASDAQ:VOD.US) are trading around their highest for five years, supported by a 5.3% yield and the prospect of a big cash return from sale of its interest in Verizon Wireless (VZW).

But Vodafone is suffering declining revenues, its dividend isn’t covered by the free cash flow generated by Vodafone-controlled businesses, and the company is embarking on an acquisition spree after suffering years of multi-billion pound write-offs from previous acquisitions.

So there’s much to be said for bailing out and taking profits, and it’s no surprise that ace dividend investor Neil Woodford has pulled out.

Cautious

On balance, I’m staying in. But it’s a cautious stance, and I don’t think the dividend alone is sufficient to make the investment case any longer. My reasoning is based on three factors:

First, there is more upside if a deal is struck to sell VZW. Sober estimates put the value of the stake alone at 130p to 170p per share. True, Vodafone’s shares will take a hit if the VZW sale evaporates. But the value of the VZW stake won’t disappear overnight, so patience would be rewarded in those circumstances.

Secondly, I think the VZW stake will be sold. Verizon Communications is clearly keen to buy. Vodafone’s stance is changing. When a possible sale was first mooted, Vodafone’s management would have had little option but to return all the cash to shareholders and preside over a shrunken company — generally, executives don’t like those sort of deals. Now it has broken cover on a plan that could use some of the proceeds  for growth.

A connected world

That’s the third factor. Vodafone is making much more of its ‘unified communications strategy’ — basically, linking fibre with mobile to offer customers bundled services. Last quarter it sealed deals for fibre access in Spain, Italy and Germany in addition to its game-changing £7bn offer for Kabel Deutschland. In the enterprise segment, it has re-branded the old Cable and Wireless to offer converged services to business.

That makes sense in a smartphone world driven by data and content. It’s defensive, with broadband being a stickier product, and it adds a new dimension for growth. This is the beginning of a sea-change in the market and Vodafone could be a winner or loser, but I’m sticking it out for the time being.

Yield

And that 5.3% yield is generous compensation, though Vodafone has become a riskier share. In contrast, the Motley Fool’s pick for the top income stock of 2013 has a dividend that’s as safe as they come. It’s also yielding well over 5%, and the company has a policy of increasing dividends at least in line with inflation.  That’s a great dividend to lock in – I have. You can find out more by downloading this report.  Just click here — it’s free.

> Tony owns shares in Vodafone but no other shares named in this article. The Motley Fool has recommended shares in Vodafone.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

More on Investing Articles

Union Jack flag triangular bunting hanging in a street
Investing Articles

Down 28% in a week! What’s going on with the share price of this FTSE 250 British icon?

There’s one stock in the FTSE 250 that took a bit of a battering last week. But I’m not surprised,…

Read more »

Two white male workmen working on site at an oil rig
Investing Articles

At around £28.50, Shell’s share price looks cheap to me

Shell’s share price still looks undervalued against its fossil-fuel-focused rivals to me, despite it pushing back its carbon reduction targets.

Read more »

BUY AND HOLD spelled in letters on top of a pile of books. Alongside is a piggy bank in glasses. Buy and hold is a popular long term stock and shares strategy.
Investing Articles

433 shares in this FTSE 100 dividend superstar could make me £18,803 in annual passive income!

This overlooked FTSE 100 gem has one of the best yields in the index, looks undervalued, and makes me big…

Read more »

Investing Articles

2 under-the-radar investment trusts I’d buy for a new Stocks and Shares ISA

Here are two fantastic trusts that I'd happily snap up today if I were building a Stocks and Shares ISA…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

If I’d put £1k in Games Workshop shares 5 years ago, here’s how much I’d have now!

Games Workshop shares have proved to be a stellar investment in recent years. Charlie Carman examines whether this trend can…

Read more »

White female supervisor working at an oil rig
Investing Articles

With the Middle East in crisis, will the BP share price soar?

The BP share price has leapt by a sixth, surging 16.7% since the lows of late January. Will it gush…

Read more »

Young Caucasian woman at the street withdrawing money at the ATM
Investing Articles

If I’d put £5,000 into Santander shares 1 year ago, here’s how much I’d have now

Santander shares have outperformed over the past 12 months, leaving this Fool wondering if he should add the bank stock…

Read more »

Man writing 'now' having crossed out 'later', 'tomorrow' and 'next week'
Investing Articles

55% below its all-time high, this growth stock doubles up as a value investment

Oliver says Kainos Group is one of the best technology growth stocks on the British market. He says the growth…

Read more »