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How Will Vodafone Group Plc Fare In 2014?

For most shares in the FTSE 100, 2013 was a good year and investors have likely enjoyed capital gains and rising dividend income.

That makes me nervous about investing for 2014 and beyond, and I’m going to work hard to adhere to the first tenet of money management: preserve capital.

To help me avoid losses whilst pursuing gains, I’m examining companies from three important angles:

    1. Prospects
    2. Risks
    3. Valuation

Today, I’m looking at mobile phone and communication specialist Vodafone Group (LSE: VOD) (NASDAQ: VOD. US).

Track record

With the shares at 236p, Vodafone’s market cap. is £114,525 million.

This table summarises the firm’s recent financial record:

Year to March 2009 2010 2011 2012 2013
Revenue (£m) 41,017 44,472 45,884 46,417 44,445
Net cash from operations (£m) 12,213 13,064 11,995 12,755 10,694
Adjusted earnings per share 17.17p 16.11p 16.75p 14.91p 15.65p
Dividend per share 7.77p 8.31p 8.9p 9.52p 10.19p

1. Prospects

Good progress in emerging markets is countering difficult trading in Europe at Vodafone. The recent half-time results showed a year-on-year decline in earnings per share of 2.6%, but the firm had enough confidence to raise the dividend by 8%.

The company expects proceeds from the sale of its US interests to boost the balance sheet during the first quarter of 2014. Going forward, the directors have clear plans to ramp up capital expenditure to enhance Vodafone’s network and service differentiation globally. Such investment should help the firm accommodate the rapidly increasing demand for data transmission that’s arising due to factors such as escalating smart device usage around the world.

The investment programme is encouraging, as the growth it enables in fast-growing markets should generate the cash flow needed to sustain the firm’s progressive dividend policy.

For 2014 and beyond, I think the dividend is where investors should look for their returns from a Vodafone investment.

2. Risks

Although Vodafone’s emerging-markets business continues to perform well, the trading environment in Europe remains challenging, with what the directors describe as intense macroeconomic, regulatory and competitive pressures. The firm is doing all it can to address the issues, but there is a risk that problems could continue, dragging on profitability.

3. Valuation

Vodafone’s dividend yield for the current year is running at about 4.5% with the dividend covered around one-and-a-half times by earnings. The shares are trading on a P/E rating of around 15.5, which seems like a full valuation.

Looking forward, the sale of Vodafone’s interests in the US will result in a return of funds to shareholders and reduced on-going revenue. When the dust settles after the capital return, investors should look at the dividend to judge Vodafone’s valuation in my view.

What now?

Vodafone's record on cash generation and dividends is attractive. But when we sit down to analyse a massive telecoms firm, where should we begin? What useful measures can Foolish investors use to start their research?

That's exactly the question our top analysts answer in a free Fool report called The Fool's Guide to Investing in Telecoms.

If you are considering an investment in Vodafone, you need to know what's in this report. Click here.

Kevin does not own shares in Vodafone. The Motley Fool has recommended Vodafone.