Why Vodafone Group plc Could Become A Hot Growth Stock

Vodafone Group plc’s (LON: VOD) growth could explode if the company sells its European operations.

| 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.

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.

Vodafone’s (LSE: VOD) growth has slowed to a crawl over the past few years. However, this could be about to change, as some City analysts are now calling for Vodafone split itself apart, in order to ignite growth.

Breaking up for growth 

Breaking businesses apart to stimulate growth is all the rage nowadays. Indeed, in low-growth, highly competitive industries, such as telecoms, it’s easier for smaller, individual business units to operate within separate markets.

And analysts now believe that Vodafone could adopt the same strategy in an attempt to kick-start growth.

You see, one of the key issues with Vodafone at present is its sprawling size, which is becoming a hindrance for the group. A complex corporate structure and different layers of management that overlap are actually working against the company, causing diseconomies of scale.

Even though Vodafone has managed to keep a lid on rising costs, the company’s growth has slowed to a crawl in recent years.

So, to kick-start growth there are some rumblings that the company might break itself up. The group’s African and Indian divisions could be sold to private equity buyers while Liberty Global would certainly be interested in Vodafone’s European operations.

Easier to manage 

A smaller Vodafone would certainly be easier to manage. 

For example, the group’s Indian operations, which were once the crown jewel of the Vodafone empire, are now becoming extremely cumbersome and difficult to manage. Competition in the region is increasing, margins are coming under pressure and Vodafone is trying to grapple with what seems to be an endless stream of tax demands from the Indian government.

That being said, India is still one of Vodafone’s profit centres. Regional service revenue increased by 15% for the quarter ended 31 December 2014 on an organic basis. Earnings before interest, tax, amortization and depreciation also increased at a similar rate. 

Nevertheless, while it’s becoming tougher to do business in India, the region is not Vodafone’s biggest problem. Europe has become the company’s “problem child” over the past few years, and the market is waiting keenly for Vodafone’s £7bn Project Spring European network upgrade to start yielding results.

In many ways, this could be the catalyst that forces Vodafone to consider a breakup. Spending on Project Spring is due to end this year and improved regional sales figures should follow suit. 

However, if sales growth fails to materialize, Vodafone could be pushed to offload its European operations. Liberty Global would be more than happy to make an offer. Indeed, Liberty Global has long been considered a possible target for Vodafone and the two groups are fighting for market share within Europe. 

By selling off its struggling European business, Vodafone would then be able to concentrate on its prized emerging market assets in Africa and India. In addition, exiting Europe would also help the group simplify its corporate structure, without having to undertake a complex reorganisation and sell-off high-growth assets.  

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.

Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

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

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »

Investing Articles

Are HSBC shares a FTSE bargain? Here’s what the charts say!

There are plenty of dirt-cheap FTSE 100 banking stocks for investors to choose from today. Our writer Royston Wild believes…

Read more »