Having lagged the market for so long, I suggested — last summer — that FTSE 100 communications giant and income favourite Vodafone (LSE: VOD) might finally be ready to recover. Based on the steady-as-she-goes performance of the share price since then, it would seem I wasn’t alone in thinking this.
Notwithstanding the potential for any macro issues to upset the markets, today’s trading update leads me to think recent momentum should continue over 2020.
“Good progress”
Group revenue rose 6.8% to €11.8bn over the three months to the end of 2019 thanks to a stellar performance in what remains a “challenging” European market (up 10.1% to a little under €9bn). That said, revenue from elsewhere declined 2.7% to €2.5bn.
Based on this performance, Vodafone chose to reiterate its guidance of adjusted earnings of €14.8bn-€15bn, and free cash flow of around €5.4bn for the full year.
Away from the numbers, the company also reported making “good progress” on its strategic priorities over the period, including the appointment of a senior management team for its soon-to-be-listed towers business (European TowerCo). CEO Nick Read hinted that shares of this spin-off should hit the market in “early 2021.“
Solid ‘hold’
Vodafone’s shares were up slightly this morning, suggesting investors were satisfied with what the company had managed to achieve. Then again, most aren’t invested for capital gains — it’s the dividends they’re after.
Assuming it returns the 7.9p per share currently penciled in by analysts, Vodafone yields 5.2% at its current price — far more than the 1.3% you’d receive from even the highest-paying Cash ISA.
Taking this, today’s update, and the fact that the £40bn-cap is finally trying to tackle its serious debt burden by selling assets into account, I think the stock now looks a solid ‘hold’ for those looking to generate a second income stream from their portfolio.
Holy smokes!
The fairly muted reaction to Vodafone’s trading update was in complete contrast to that afforded to tobacco giant (and fellow top-tier member) Imperial Brands (LSE: IMB). Its shares were down 8% this morning following news that the US Food and Drug Administration’s decision to ban certain vaping-related products would likely lead full-year revenue “to be at a similar level” to that achieved in 2019.
In addition to impacting sales growth, Imperial said the ban would force a write-down of the company’s flavoured inventory, resulting in a £45m hit on adjusted operating profit over the first half of its financial year. Adjusted earnings per share are predicted to come in “slightly lower than last year.”
Value trap?
The belief that vaping would offset declining tobacco sales was one reason why I was previously bullish on Imperial. Unfortunately, recent developments have forced me to re-evaluate the investment case.
Given the real possibility of further regulations being imposed in light of research showing these alternative products might be just as harmful as traditional smoking, I wouldn’t be surprised if the shares continued to fall.
Before this morning, Imperial’s stock was already trading on just 7 times forecast earnings and offering a seriously-high 11% dividend yield. Considering the headwinds it faces, I’d be staggered if cash payouts weren’t significantly reduced in the near future, even though the extent to which they are covered by profits is still slightly higher than over at Vodafone.
In my opinion, there are far less risky opportunities to generate income from stocks.
