Multinational telecoms giant Vodafone (LSE: VOD) has long been a favourite of income seekers for its relatively low-risk profile and generous dividend payouts. But I’ve been disappointed with the group’s performance over the last few years, with revenues plummeting and the company reporting a pre-tax loss in three of the last four years.
Project Spring
In its annual results for FY2016, the FTSE 100 firm reported revenues just shy of £41bn, that’s a full £5.4bn lower than the £46.4bn it posted in 2012. But that’s not all, the group also revealed a pre-tax loss of £449m, a far cry from the £9.6bn profit it announced just four years earlier.
But as revenues and profits have faltered, the company has managed to increase its generous yet fragile dividend payouts, and hence maintain healthy levels of income for its loyal shareholders. I think Vodafone has managed to ride the storm well, and now that its £19bn infrastructure investment programme known as Project Spring is complete, things should start to turn around pretty quickly.
Turnaround year?
The company revealed an encouraging first half to fiscal 2017 with Europe slightly ahead of expectations, helped by a strong performance in its German and Italian markets. Vodafone is now Europe’s fastest growing broadband operator and is driving rapid uptake of consumer fixed line and TV services, while its Enterprise business continues to outperform its peers. Faster revenue growth is also being translated into margin expansion, supported by a focus on cost efficiency.
But not everything is going Vodafone’s way. Increased competition in India has led to lower revenues and profitability. The group is responding by strengthening its data and voice commercial offers and by focusing on acquiring frequencies in the more successful and profitable areas of the country.
I think this could be a turnaround year for Vodafone. The City expects a significant lift in revenues, with consensus estimates suggesting a £6.2bn improvement to £46.2bn, and a swing to pre-tax profits of £2.5bn, compared to the £449m loss reported last year. At current levels the shares support an appealing prospective dividend yield of 5.9% with the promise of significant share price growth to come.
The rise of internet shopping
Another FTSE 100 company that’s been undergoing change in recent times is of course Royal Mail (LSE: RMG). The postal services provider continues its restructuring programme as the decline in the letters part of the business is offset by the surge in parcels as a result of the rise in internet shopping.
Management has been busy improving performance and cutting costs, while at the same time increasing the healthy dividend. The shares have pulled back in recent months and present a buying opportunity for investors looking for a growing dividend (currently yielding 5%), together with an attractive valuation, with the shares looking cheap at just 11 times earnings.
