Should investors buy Airtel Africa shares today?

Airtel Africa shares currently offer an attractive 4% dividend yield. Are they worth buying? Edward Sheldon offers his take on the stock.

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Airtel Africa (LSE: AAF) shares were added to the FTSE 100 index last year. However since then, they haven’t performed very well.

Are the shares worth buying today now they’re trading at a lower price? Let’s discuss.

Four reasons to buy

Looking at Airtel Africa today, there’s a lot to like about the company from an investment perspective, to my mind.

For a start, the company has considerable growth potential. Airtel operates in 14 countries across Africa including Nigeria, Kenya, and the Democratic Republic of the Congo, providing mobile data, voice, and banking services. And in these African countries, demand for its services is growing rapidly.

This is reflected in a recent trading update. For the first nine months of the financial year ending 31 March, the group reported:

  • Total customers of 138.5m, up 10.1% year on year
  • Revenue growth (in constant currency) of 17.3%
  • Mobile money revenue growth of 29.8%

Secondly, the company is quite profitable. For the first nine months of the financial year, return on capital employed was 23.3%. Meanwhile, for the last three financial years, it has averaged 17.2%. Companies that generate a high return on capital have more money to invest for future growth.

Third, the company pays a decent dividend. Last financial year, Airtel paid out total dividends of five cents per share. At today’s share price, that translates to a yield of nearly 4%.

Finally, the valuation is quite low. Currently, Airtel Africa shares sport a forward-looking price-to-earnings (P/E) ratio of just 7.1. To put that figure in perspective, the median forward-looking P/E ratio across the FTSE 100 is about 13.3 right now. So there appears to be some value on offer here right now.

Risks

Having said all that, there are a few risks to be aware of here. One is rising costs.

Telecoms is a capital intensive industry and for the nine months to the end of 2022, Airtel’s capital expenditure rose 6% to $457m. Higher costs could eat into profits.

Another is competition. Some rivals here include MTN, Vodacom, and Orange. MTN is the largest telecoms company in Africa and my research shows it has a much stronger brand than Airtel.

Of course, we can’t ignore political or macroeconomic turbulence in the company’s main markets. African economies can be significantly more volatile than developed markets like the UK and the US.

We are continually faced with uncertain and constantly evolving legal and regulatory requirements in some of the markets where we operate”, the company wrote in its latest update.

My view

Weighing this all up, my take is that Airtel Africa shares are worth a closer look right now. I think they offer value.

However, given the risks, this is not a stock I’d take a large position in. I’d keep my position small and buy other stocks for diversification.

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.

Edward Sheldon 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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