The Motley Fool

Why I’ve turned positive on the Vodafone share price

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.

Image source: Getty Images

When Vodafone (LSE: VOD) boss Nick Read announced plans to sell off the firm’s European radio towers in July, the group’s share price immediately rose by 10%. VOD shares haven’t stopped rising since and have now gained more than 20% since that day in July.

Why is the market so pleased with Read’s plans? In my view, selling the towers business is a get-out-of-jail-free card for the £43bn telecoms group. After a run of acquisitions that’s turned the firm into Europe’s largest converged (mobile and fibre) network operator, I believe Vodafone has too much debt.

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US$12.3 TRILLION out of thin air…

And if you click here we’ll show you something that could be key to unlocking 5G’s full potential...

Deal-making ex-CEO Vittorio Colao has gone, but his replacement was previously the group’s chief financial officer. I suspect Read was planning all along to use the group’s infrastructure assets to strengthen its balance sheet, without needing to ask shareholders for cash.

Analysts quoted in the press have suggested the towers business could be worth as much as €13bn. I suspect Vodafone will only sell a part of the business and will net a much smaller amount. But it should be enough to cut debt, reducing pressure on the group’s cash flow as it returns to growth.

What about the dividend?

Shareholders haven’t escaped without a dividend cut. Read cut the payout by 40% to €0.09 per share at the end of March. It was an uncomfortable moment, but necessary and not really a surprise.

The payout now looks more sustainable to me. Based on last year’s accounts, I estimate the reduced VOD dividend should be covered twice by free cash flow. In turn, this should make it easier for the firm to fund capital expenditure and further debt repayments.

A super cash cow?

There’s an old stock market saying that sales are vanity, profit is sanity, and cash flow is reality. It’s a useful reminder that, if in doubt, we should always value a company based on its ability to generate surplus cash. Nothing else really matters.

Vodafone’s strong cash generation is one of the group’s main attractions for investors. In recent years, the group’s free cash flow has been consistently ahead of reported profit. This may seem odd, but it’s mostly a consequence of the way in which the firm’s acquisitions and restructuring has been accounted for.

My sums indicate free cash flow totalled around €4.4bn last year. That values the stock on less than 10 times free cash flow. I see that as an attractive price tag, given the group appears to be poised to return to growth.

European domination?

In the UK, we tend to think of Vodafone as a mobile operator. And of course it is. But across Europe, the firm also owns cable and fibre networks that connect 54m households. This converged business is where the group sees its future.

The group’s revenue is expected to return to growth this year after three years of declines. Profits are expected to rise too, and this recovery is expected to gather pace in the 2020/21 financial year.

VOD stock still looks expensive against forecast earnings, on a P/E of 20. But if we price the stock against free cash flow and its dividend yield of 5.4%, the price tag looks very reasonable to me.

I think the shares look attractive as an income buy.

“This Stock Could Be Like Buying Amazon in 1997”

I'm sure you'll agree that's quite the statement from Motley Fool Co-Founder Tom Gardner.

But since our US analyst team first recommended shares in this unique tech stock back in 2016, the value has soared.

What's more, we firmly believe there's still plenty of upside in its future. In fact, even throughout the current coronavirus crisis, its performance has been beating Wall St expectations.

And right now, we're giving you a chance to discover exactly what has got our analysts all fired up about this niche industry phenomenon, in our FREE special report, A Top US Share From The Motley Fool.

Click here to claim your copy now — and we’ll tell you the name of this Top US Share… free of charge!

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.

Our 6 'Best Buys Now' Shares

Renowned stock-picker Mark Rogers and his analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.

So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. Because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply click below to discover how you can take advantage of this.