Should I buy Vodafone shares or this FTSE 250 stock?

This Fool explains why he believes this FTSE 250 stock could make a better investment than Vodafone shares, considering its growth potential.

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When it comes to income stocks, Vodafone (LSE: VOD) shares are one of the most attractive investments in FTSE 100. However, the company has a rival in the FTSE 250. I think this particular stock may be a better investment for income and growth in the long run. 

A challenger to Vodafone shares

That company is Airtel Africa (LSE: AAF). Like Vodafone, this is a telecommunications enterprise. But its core markets are in Africa, not Europe, as is the case with its FTSE 100 peer. 

I think this presents an exciting opportunity. Unlike Europe, the African telecoms market is still relatively underdeveloped, but it’s expanding rapidly. Africa’s young, growing population is becoming increasingly tech-enabled, driving demand for data and other telecom services. 

In some cases, Africa has almost skipped a technological generation. Consumers, who have never used a bank before have opened their first accounts through online financial institutions. By comparison, in many Western markets, consumers still rely on traditional high street banks. 

Airtel is also a leader of mobile money services across Africa. Its mobile money business is worth around $2.7bn and recently received investment from Qatar’s sovereign wealth fund

Comparing the first quarter results for Airtel and Vodafone shows just how big the opportunity is for the former. For the quarter ended 30 June, Airtel’s revenue increased 33%, while underlying earnings before interest, tax, depreciation and amortisation jumped 46%. Data revenues rose 37% and mobile money revenues increased 54%. 

Vodafone’s revenues grew 5.6% in the first quarter. 

These figures suggest to me that, compared to Vodafone shares, Airtel is the better growth investment.

FTSE 250 opportunity

When it comes to income, Vodafone is an undisputed FTSE 100 champion with a dividend yield of around 6%, at the time of writing. However, Airtel isn’t far behind. 

The stock currently offers a dividend yield of 3.3%. This seems small at first, but the payout is covered 2.2 times by earnings per share. As such, the company has more room to increase its payout in the years ahead.

By comparison, Vodafone’s payout cover is around one, which gives the company very little flexibility. For example, if earnings were to fall around 20%, management may have to cut the payout. 

Considering all of the above, I’d buy Airtel over Vodafone shares today. I think the company has a better growth profile, and while its dividend yield may be less than half of that of Vodafone, with a payout cover of 2.2 times, there is more room for growth. 

That said, I’m not going to take the company’s growth for granted. Vodafone is struggling in Europe because the telecommunications market here is incredibly competitive. It also requires hefty investments, some of which may never earn a return.

Airtel has been able to navigate these challenges, so far, but there’s no guarantee it will continue to do so. As money floods into Africa, the market is only going to become more competitive. 

Still, I’d buy the stock today as an alternative to Vodafone, considering its potential and current dividend yield. 

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.

Rupert Hargreaves has no position in any of the shares mentioned. The Motley Fool UK has recommended Airtel Africa Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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