The Vodafone Group (LSE: VOD) share price has risen by more than 25% since the end of September. Although this popular income stock is still down by 40% on five years ago, I think the FTSE 100 telecoms group may now be on track for a return to sustainable growth.
In this piece I want to explain why I’m tempted to add Vodafone’s 6% dividend yield to my income portfolio.
A return to growth
Since CEO Nick Read took charge in 2018, he has focused his efforts on maximising revenue from the group’s network assets, cutting costs and concentrating the business on two core geographic regions — Western Europe and Sub-Saharan Africa.
Across Europe, Vodafone is cutting the cost of its 5G rollout by sharing network infrastructure with other firms. That’s expected to save €2.5bn over 10 years. Meanwhile, ever-increasing demand for mobile data is driving revenue growth. The company says that its new unlimited data plans are helping to increase the average spend per customer each month.
In Africa, Vodafone had 85m mobile data users at the end of September. During the previous six months, the firm handled nearly 7bn mobile money transactions. Internet and banking services are essential for economic growth, but many Africans don’t have access to conventional banks or broadband. Mobile services are filling this gap. I expect Vodafone’s African growth to continue.
Vodafone share price: cash windfall boost?
I think these gradual changes will support future profit growth. But Vodafone is also expected to enjoy a big cash windfall at some point this year.
The money will come from the planned flotation of Vodafone’s radio tower business, Vantage Towers. The group says Vantage has 82,000 sites across 10 countries, with a market-leading position in nine of them.
As a standalone business, Vantage is expected to generate an adjusted cash income of €742m per year before finance costs and some other expenses. One estimate I’ve seen suggests Vodafone could receive around €4bn from the flotation, assuming the company sells about one quarter of Vantage.
What could go wrong?
I’m optimistic about the outlook for Vodafone. But I can see risks too.
One problem for telecoms firms is that they continually need to spend money to upgrade their networks. 3G, 4G and now 5G have all required many billions in investment. Licensing the radio spectrum needed for mobile transmission is also expensive. At the same time, market competition limits price increases. As a result, I can see some risk that Vodafone will struggle to generate satisfactory levels of profit on its network spending.
Indeed, past spending is still burdening the firm. Vodafone had net debt of €44bn at the end of September. Cash from the Vantage flotation should help to reduce this, but my sums suggest Vodafone’s borrowings are already close to their comfortable limit.
Despite these concerns, I’m tempted. In my view, Vodafone’s share price reflects these risks. With the stock offering a forecast yield of 6%, Vodafone also meets my requirements for an income investment with growth potential.
