As an investor in UK shares I know the seductive draw of double-digit yields. The long-term effects of compound interest could turn my fairly average retirement portfolio into a stonking winner.
This is especially true right now.
Money is tight everywhere. The cost of living crisis is hitting us all hard.
Only two companies in the FTSE 100 currently offer investors yearly dividend payouts of 10% or more. If they keep these yields high while growing profits, the effects of compounding (in which interest is reinvested and earns interest of its own) over many years could be incredibly valuable.
The first 10% yield stock is insurer Phoenix Group. I’ll leave that analysis for another day. I’ve said this month already I see rival Aviva as a better option. Instead, I’ll focus on the other target, Vodafone (LSE:VOD).
Vodafone is a FTSE 100 stalwart. It started selling its shares to the public at least half a decade before the internet was widely available in homes. Today the telecoms company is probably best known for its broadband and mobile phone deals.
It would definitely be a contrarian buy at around 72p. That’s because the Vodafone share price has been falling steadily for the last 10 years!
But if investment guru Warren Buffett is right, picking up unloved shares like this on the cheap could give me some of my best winners.
So let’s dive into the mobile side of the business first.
In June, Vodafone announced a planned merger with Three UK. This would push it to the top of the leaderboard when it comes to 4G and 5G mobile spectrum.
Recently, the two companies have pledged £11bn to build out Britain’s 5G data network. I’d suggest this is a pretty obvious sop to regulators to allow the merger to go through.
If approved, this would give it dramatically higher domestic market share.
The major risk here is that the merger fails to get the green light. Execs would have to go back to the drawing board to get growth moving in the right direction.
Vodafone has been selling off valuable assets for quite some time. This year, the company sold another €500m of shares in Vantage Towers. This is its European mobile tower arm, spun off from the main business in 2020. The plan then was to cut debt and fund more 5G projects.
We can see from its balance sheet that net debt has barely moved in three years. And its working capital has fallen by €1.6bn since 2021.
Then in October 2023, the company agreed a €5bn deal to divest its Spanish business. While this arm has been notably struggling, operating in fewer markets could impact Vodafone’s overall growth.
Equity researchers see Vodafone’s net profits falling in 2024, before rebounding the following year.
And to be clear, that 10% dividend yield doesn’t look secure. City analysts have pegged Vodafone’s 8.9p per share dividend to fall in 2024 to 8.1p. Another cut to 7.7p per share is expected in 2025.
It’s critical that I do my due diligence when it comes to spying tasty-looking opportunities. Without a realistic appraisal of sales, profits and growth, I could fall victim to value traps.
And with the above in mind? There will be better opportunities ahead than Vodafone, I think.