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FTSE 100 7% yielder Vodafone’s share price keeps falling. Time to buy?

Telecoms giant Vodafone Group (LSE: VOD) is one of the highest-yielding stocks in the FTSE 100, with a forecast dividend yield of 7%.

Vodafone’s share price has fallen by about 20% so far this year, but the group’s recent results gave me confidence in the outlook for shareholders. Although the planned departure of respected chief executive Vittorio Colao is a risk, I think the shares could be good value at current levels.

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Follow the cash

After a long period of investment in upgrading its network, Vodafone’s earnings are finally starting to recover. Adjusted earnings rose by 44% to 11.6 euro cents per share last year, while adjusted operating profit climbed 22% to €4.8bn.

But what really grabbed my attention was the group’s free cash flow. Excluding spectrum payments, it rose by 34% to €5.4bn last year. This has left the stock trading on a price/free cash flow ratio of just 10.3.

This free cash flow was also enough to comfortably cover last year’s dividend of 15.07 cents per share, which totalled €4,020m. Even when spectrum payments were included, the group’s free cash flow of €4,044m still covered the shareholder payout.

Net debt was almost unchanged at €31.5bn last year, providing further confirmation that the dividend was funded with surplus cash, not borrowed money.

Why I’d buy

Vodafone’s strong cash generation is expected to continue this year. The firm’s guidance is for free cash flow excluding spectrum payments of €5.2bn. Although the dividend still won’t be covered by earnings, I believe this cash figure should mean that the payout remains safe.

Investment in 4G technology and fibre networks is now helping the firm to return to growth. The group should be well positioned to become a European leader in converged data services, which switch seamlessly between broadband and mobile.

For income investors, I believe Vodafone’s forecast dividend yield of 7% is a good long-term buying opportunity.

A cash cow I’d buy today

Home and motor insurance firm Admiral Group (LSE: ADM) has become famous among investors for its generous dividends. The group is often able to pay out all of its earnings to shareholders, thanks to its unusual business model.

Many of the group’s policies are co-insured or reinsured with other big insurance firms. This means that in return for a fixed fee, the other insurer will take some or all of the risk in the event of a claim.

A second area of strength is the group’s conservative claims reserving policy. Insurance companies set aside a certain amount of cash each year to settle claims. Any money that’s left over can be released from these reserves and is typically returned to shareholders. By reserving carefully, insurers are able to return surplus capital from the previous year to shareholders. This is one of the main sources of cash for Admiral’s special dividends.

Super profits

Strong management and a clever business model have made the Cardiff-based firm one of the most profitable insurers in the UK. Admiral generated a return on equity of 55% last year, compared to 17% for Direct Line and 22% for Hastings Group.

The shares currently trade on 15.6 times forecast earnings and offer a prospective yield of 6.3%. In my view this is too cheap to ignore. I rate Admiral as a long-term income buy.

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Roland Head has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.