The significant total return potential of Vodafone (LSE: VOD) is the reason why it makes sense as a purchase for long term investors. The company has endured a challenging number of years as a result of the poor performance of the Eurozone but, looking ahead, Vodafone’s shares could rise at a rapid rate.
In fact, they have been a strong performer in recent months, increasing in value by 8% in the last year, versus a flat FTSE 100. A key reason for this appears to be that investors are beginning to factor in an improved period for the company, with the Eurozone economy likely to enjoy better growth in the next five years than it has in the last five.
A crucial part of this is the single-currency region’s adoption of a looser monetary policy, with the ECB stating that its quantitative easing programme has room to significantly expand. This, alongside a near-zero interest rate, should mean that the performance of the economy picks up and benefits European-focused stocks such as Vodafone.
Furthermore, Vodafone’s strategy of investing in its infrastructure appears to be a sound strategy that positions the company for future growth. In fact, Vodafone is investing around £19bn in its network between 2014 and 2016 and this should mean that it has a highly efficient fixed and mobile network that provides its customers with a unified communication offering. This means that the 20% rise in earnings which is forecast for next year could prove to be longer lived than the market currently anticipates.
Meanwhile, Vodafone continues to be an excellent income play. It yields a very impressive 5.5% and has a superb track record of dividend per share growth, with it having risen at an annualised rate of over 5% during the last five years. And, with Vodafone having a relatively stable business model, additional dividend rises are likely to take place over the medium to long term, not least because, as mentioned, its bottom line is due to rise.
A potential catalyst to boost Vodafone’s total return even further is the scope for additional acquisitions, with the company’s aim being to buy undervalued assets which offer strong cash flow and growth potential. With the European economy now seemingly on a more stable footing than in previous years, it would be of little surprise for Vodafone to engage in further M&A activity in the region. That’s especially the case since it has only a modestly leveraged balance sheet which could accommodate further debt, as well as relatively resilient cash flow.
Of course, Vodafone’s decision to sell its 45% stake in Verizon Wireless in 2014 may have caused investors to worry about its potential overexposure to Europe. However, its strategy to add value while asset prices are low in the single-currency region now seems to be on the cusp of delivering improved financial performance.
With a high yield and growth potential, Vodafone’s total return could be relatively high moving forward, thereby making it a strong buy for long term investors.
