It’s entirely possible that you’re still sitting on your Vodafone (LSE: VOD) (NASDAQ: VOD.US) shares, and wondering what to do with them. Owing to its status as one of the most reliable blue-chip income stocks, many investors have accumulated large holdings, but the future of the business is uncertain.
The company is sitting on a mountain of capital from the Verizon sale, in part to be allocated toward growth through a combination of acquisitions and network upgrades.
However, in Europe — a region making a slow recovery from a recession, which happens to be the market where Vodafone generates most of its revenue — the firm is suffering from what it describes as “intense” price competition with rivals. In the most recent quarter, ended 31 December, European revenue slumped 10%.
After a solid run, in which the shares reached a 12-year high, whatever upside remains is open to scrutiny.
So, should you ‘buy’, ‘sell’ or ‘hold’? I believe you have to ask yourself two questions:
Will Vodafone’s earnings grow?
The types of acquisition Vodafone makes could be crucial. Its £6.6bn purchase of Kabel Deutschland last year offers some clues as to Vodafone’s strategy, as this marks the firm’s entry into the television and broadband markets. It is common in Europe for consumers to get their TV, broadband, landline and mobile services from the same provider, known as the “quad play” market.
Vodafone’s chief executive Vittorio Colao, is no dummy and it’s evident he understands the need to prevent Vodafone becoming outmoded. Staying one step ahead of the competition is crucial. For instance, the firm is already ahead of the curve when it comes to its 4G offering, with two million 4G customers in 13 countries. As smart phones become more central to consumers’ digital lives — through media consumption with apps like Spotify and YouTube — high speed 4G internet could be a lucrative revenue stream.
I’m particularly interested in observing Vodafone’s play in emerging markets, such as India and Africa, where fixed-line communication isn’t universally available. Mobile data is more reliable, as well as cheaper, and Vodafone’s service revenue grew 17% across these regions in the most recent quarter. This is only likely to increase, as emerging market economies becoming driven by consumer-spending. The prospect of an increasingly wealthy, burgeoning middle class underpins strong growth prospects long term.
Is it a stable enough business?
Of course, your decision to sell depends on how well you think Vodafone will do. The shares have been as low as 160p in the last two years, and if you bought on the cheap, the temptation might be there to bank a profit. Alternatively, if feel like nothing has changed, and the business still matches the criteria that made it attractive to you in the first place, then you may consider holding.
For a buyer, Vodafone’s shares are valued steeply, trading on a P/E of 24, but this will fall to 17 based on projected earnings next year.
Obviously, I can’t answer any of these questions for you, and you’ll have to draw on your own experience as an investor to make a decision for yourself.
