The FTSE 100 is filled with investment opportunities for an investor like me with capital, especially in the current stock market environment. Relatively speaking, £500 is not actually that much money. However, it’s enough to buy around 387 shares of Vodafone Group (LSE:VOD).
The telecommunications giant likely doesn’t need any introduction. But it may seem odd to describe it as a “gem”. After all, the Vodafone share price has been on a downward trajectory for the last five years, with its market capitalisation being basically slashed in half. Yet, that may all soon be a thing of the past. Let’s take a closer look at what could be a superb addition to my portfolio.
The FTSE 100 turnaround opportunity of 2022
In 2018, management executed a rather expensive merger between Vodafone India and Idea Cellular to form a new group called Vodafone Idea. This multi-billion Euro arrangement, paired with unfavourable foreign exchange rates and impairment charges, sent the bottom line deep into the red by around €7.6bn.
Needless to say, that’s a pretty horrific sight for investors who’ve historically depended on these FTSE 100 shares as a reliable source of dividend income. And even today, Vodafone Idea continues to be a multi-billion-euro drain on profitability. But as was demonstrated in the latest 2022 annual report, this may no longer matter.
Despite the pressures of inflation, profit for its 2022 fiscal year ending in March came in at €2.6bn. That’s under the €2.7bn reported before the 2018 merger debacle started. But its higher-margin operations in Germany and expansion into Africa are paying off, especially with the rollout of 5G creating new revenue opportunities.
Africa, in particular, has caught my attention. Besides reaching 184.5 million mobile users, the firm has become the region’s leading provider of financial services. Its fintech M-Pesa platform now caters to 52.4 million users, processing €19.9bn of transactions over the last 12 months.
This encouraging progress has yet to translate into any meaningful revenue growth. But it has helped restore profit margins. So much so that the return on capital employed now stands at 7.2% versus 5.1% in 2021. In other words, more shareholder value is being generated, supporting the FTSE 100 stock’s current 6% dividend yield.
Taking a step back
As alluring as the group’s sustainable-looking dividend may be, I do have some concerns. Running a telecommunications infrastructure business isn’t exactly cheap. And Vodafone has racked up a considerable amount of debt over the years. To be specific, it currently has €58.1bn of long-term loan obligations. And with interest rates on the rise, this could prove to be quite problematic.
However, it’s worth noting that €46bn worth of these debts is held in bonds with maturity dates that span from today all the way to 2059. And therefore, there doesn’t appear to be any immediate solvency crunch on the horizon for this FTSE 100 business.
Seeing such a high degree of financial leverage could hamper progress moving forward. Yet despite this handicap and all the weight of underperforming historical decisions, the current management team has managed to rise above it, delivering an attractive dividend as well as long-term growth potential. That’s why I think this company could make a fine addition to my income portfolio.
