3.6% and 11.3% yields! Should I buy these cheap FTSE 100 shares?

Vodafone and Airtel Africa are two FTSE 100 shares that have caught my attention. One has a sky-high dividend, but the other has massive growth.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Person holding magnifying glass over important document, reading the small print

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

I’m eyeing up two FTSE 100 shares that seem worlds apart, despite both being in the telecoms sector.

The first is Airtel Africa (LSE:AAF), which yields a fairly puny 3.6%. Then, there’s Vodafone (LSE:VOD), which pays out a hefty 11.3%. That would seem to be a big point in Vodafone’s favour right out of the gate.

But let’s dive further into both of the options before drawing any conclusions.

Faster than a cheetah

Airtel Africa, with operations across 14 African nations, is a fast-growth player in the telecoms and mobile money sector.

Mobile money services allow people in low-resource countries without bank accounts to deposit, transfer, and receive cash using just their phones.

The company’s growth narrative is underpinned by a significant increase in its customer base, fuelled by the expansion in mobile data and mobile money services.

Airtel Africa reported an eye-popping revenue increase of 17.6% in constant currency and an EBITDA increase of 17.3% in the year ending 31 March 2023.

These figures indicate robust operational health and suggest potential for sustained growth and dividend payouts. Of course, the volatility of the developing market currencies in which the company earns relative to the pound is a big risk to keep in mind for UK-based investors.

Slow and steady

Vodafone is a well-established entity with a network spanning 17 countries and stakes in five more​​​​, with its operations largely concentrated in European markets.

This extensive reach, however, hasn’t shielded it from financial headwinds.

The company saw a modest revenue growth of 2.7% and a decline in EBITDA in the financial year ending 2023.

Additionally, it faced competitive pressures and operational challenges, particularly in key markets like Germany​​​​​​.

Vodafone’s high debt level, combined with these issues, casts a shadow on the sustainability of its high dividend yield. Could a dividend cut be on the way, given its debt-to-equity ratio is 110%, compared to the telecoms sector average of 80%?

Value or growth?

Vodafone’s valuation metrics, including a rock-bottom price-to-earnings (P/E) ratio of 2.26 and a price-to-sales (P/S) ratio of 0.59, make the stock look like a bargain.

However, the operational and financial challenges make me cautious.

In contrast, Airtel Africa’s P/E ratio of 18 is backed by demonstrated lightning-fast growth rates.

Beyond the numbers, there’s a broader context to consider. Airtel Africa is a leader in a market with huge, long-term, growth potential. Africa’s telecommunications sector is rapidly expanding, driven by an increasing population and growing digital adoption.  

This context provides a backdrop for Airtel Africa’s growth story, making its higher valuation metrics easier to swallow.

In comparison, Vodafone’s challenges are more pronounced in its mature markets. The competitive landscape in Europe, coupled with operational inefficiencies, have put pressure on its growth and profitability.

While Vodafone has made efforts to streamline operations and reduce costs, these measures may take time to reflect in improved financial performance.

I plan to add a small position in Airtel Africa to my portfolio when I next have spare cash to deploy.

Vodafone, despite its high dividend yield, seems less promising to me due to its stubborn financial and operational challenges.

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.

More on Investing Articles

Shot of a senior man drinking coffee and looking thoughtfully out of a window
Dividend Shares

How much passive income could I generate with just £10 per day?

Ken Hall wants to create his £10,000 yearly passive income dream by investing just £10 every weekday day in Footsie…

Read more »

Investing Articles

Is the Rolls-Royce share price too high? Here’s what the experts say

The Rolls-Royce share price has surged over two years, representing one of the FTSE 100’s greatest success stories. But is…

Read more »

Smart young brown businesswoman working from home on a laptop
Investing Articles

A top S&P 500 growth share and an ETF I’d buy this November!

I think this S&P 500 share and exchange-traded fund (ETF) could be brilliant additions to my ISA or SIPP right…

Read more »

US Stock

Here are the best-performing S&P 500 stocks after the US election result

Jon Smith notes some of the largest gainers from the S&P 500 yesterday and explains how the election result has…

Read more »

Growth Shares

2 UK stocks knocking on the door of promotion to the FTSE 100

Jon Smith points out a couple of UK stocks that he feels could be ready for the big league based…

Read more »

Investing Articles

Rolls-Royce shares just fell 7%. Is it time to buy?

This investor in Rolls-Royce shares takes a look at the FTSE 100 engine maker's trading update to see what caused…

Read more »

Young Black woman looking concerned while in front of her laptop
Investing Articles

What’s going on with the Auto Trader share price?

Paul Summers takes a closer look at why the Auto Trader share price has tumbled despite the company posting higher…

Read more »

Investing Articles

Legal & General shares look set to give me a mind-blowing 10.22% yield in 2026!

Harvey Jones is getting a brilliant second income from his Legal & General shares and expects even more to come.…

Read more »