Is Vodafone Group plc Dependent On Debt?

Are debt levels at Vodafone Group plc (LON: VOD) becoming unaffordable and detrimental to the company’s future prospects?

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vodafone

Vodafone (LSE: VOD) (NASDAQ: VOD.US) has been in the news a lot over the last year, with the deal to sell its stake in Verizon Wireless to Verizon Communications dominating news flow.

Indeed, it’s a big deal for the company and for its investors. Of course, shares have reacted positively to the news: over the last year Vodafone is up 46% while the FTSE 100 is up just 8%. The prospects, then, seem bright for the company, as bid rumours continue to persist regarding the company’s European projects, as well as Vodafone also being linked to acquisitions of its own, as it seeks to grow the business following the sale of its most profitable division.

So, does Vodafone have the financial firepower to make acquisitions? Or is it dependent on debt, with the Verizon Wireless sale being an attempt to reduce debt levels to put Vodafone on a more stable financial footing?

Excessive debt?

With a debt to equity ratio (including the Verizon Wireless division, which is listed as an asset held for sale) of 40% as at September 2013, Vodafone appears to be only moderately leveraged. This means that for every £1 of net assets (total assets less total liabilities) there is £0.40 of debt, which is not excessive by any means and, in fact, highlights that Vodafone could increase its financial gearing by a considerable amount before the balance sheet takes on too much debt.

This could mean the company making acquisitions or simply increasing debt in an attempt to improve returns to shareholders, with higher debt levels providing a potential turbo boost to return on equity. Either way, Vodafone appears to have the financial flexibility to do so.

Looking ahead

As mentioned, Vodafone is continually linked with rumours concerning acquisition activity. However, as a standalone investment it still seems to make sense. For instance, Vodafone continues to offer an above-average yield of 4.6% (ahead of the FTSE 100 yield of 3.5%) and, furthermore, is forecast to at least maintain dividend per share payments over the next two years.

While the prospect of a flat dividend may sound slightly disappointing, with inflation at 2% a yield of more than twice that (plus the potential for capital growth) may turn out to be a relatively strong return. As such, Vodafone seems to offer bright prospects for the rest of the year and beyond.

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.

> Peter does not own shares in Vodafone.

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