Shares in telecoms giant Vodafone Group (LSE: VOD) fell this morning after the company’s annual profits came in slightly lower than expected. As I write, Vodafone’s share price is down 7%, leaving the stock just 5% higher than it was a year ago.
Vodafone has been on my watch list for some time, in part because the stock’s 5.8% dividend yield is one of the highest in the FTSE 100. After crunching today’s numbers, I still think this income favourite could be a profitable addition to my portfolio.
Only a small miss
Vodafone is seen as a mobile operator in the UK, but the company operates both mobile and broadband networks in Western Europe. It also has a large mobile business in Africa, which I see as a key source of long-term growth.
Customer numbers rose in both Europe and Africa last year, but this progress was offset by lower revenue from roaming charges and other travel-related services.
Overall, the group’s revenue for the year fell by 2.6% to €43,809m, while adjusted EBITDA (a measure of profits before various deductions) came in at €14,386m. This was 1.2% lower than in 2019/20 and was also about 1% lower than market forecasts.
It’s this earnings miss which seems to have triggered Vodafone’s share price wobble today.
Personally, I don’t see much to worry about in the group’s latest numbers. Vodafone’s debt reduction, cash generation and the dividend were all in line with expectations last year. What matters more to me is the company’s new guidance on its plans for the next few years.
Spend more, earn more?
In my view, the biggest challenge for large telecoms operators like Vodafone is the constant need to upgrade and improve their networks. If they spend too little, they fall behind. But if they spend too much, too soon, they lose money by having unused capacity.
Vodafone CEO Nick Read has decided that, to return the business to growth, he needs to spend a little more. Read plans to increase spending over the next few years to make sure the company’s European networks offer a consistent high-speed service on both fixed line connections and 5G mobile.
The company will also improve its business services and its online presence. Business customers generally pay higher prices, while moving services online is ultimately a cost-saving measure — fewer call centres and shops will be needed in the future.
Vodafone shares: is the price right?
Vodafone is targeting consistent revenue growth in both Europe and Africa over the medium term. Read reckons that this should generate “mid-single digit” percentage growth in both earnings and cash generation.
If the company can deliver on these targets, then I think the shares should perform well over time. However, one downside to this new plan is that dividend growth might be put on hold.
Today’s guidance is for an unchanged “minimum dividend of 9.00 eurocents per share.” But there’s no mention of any plan to increase the payout.
This looks sensible to me. Vodafone’s 5.8% dividend yield is already well above average, but the firm’s share price has lagged the FTSE 100 in recent years. In my view, the only way to fix this is to deliver sustainable growth.
Based on today’s results, I’d be happy to buy Vodafone shares at the current price.
