The latest numbers from telecoms giant Vodafone Group (LSE: VOD) show the business returning to growth. This suggests to me that the changes being made by CEO Nick Read are delivering results. Despite this positive news, the Vodafone share price has lagged the FTSE 100 over the last year, gaining just 6% compared to 18% for the index.
At current levels, I’m tempted by Vodafone’s 6.3% dividend yield. I reckon the shares could be cheap. Should I consider buying this stock in September?
Growth story?
What excites me about Vodafone as a potential investment are the group’s African operations.
Over the 12 months to 30 June, the number of Vodafone mobile customers in Africa rose by 10% to 181.6m. That’s nearly three times more than the 65.6m mobile contract customers Vodafone has in Europe. At the moment, only half of Vodafone’s African customers are data users, but this number is rising steadily.
It’s a similar story in mobile money. The group’s M-Pesa money transfer business now has 49.7m customers and carries half of Kenya’s gross domestic product, according to a report in the Financial Times. Transaction volumes rose by 45% to 4.5bn during the second quarter of this year, compared to the same period last year.
At the moment, Vodafone’s African customers spend less with the company than its European ones. But over time, I think customer spending in Africa is likely to rise faster than in Europe. In the long term, I think it’s the growth of the African business that’s most likely to drive Vodafone’s share price higher.
This is what worries me
Vodafone stock dropped in May when Mr Read announced plans to increase spending on network upgrades and new services.
Mr Read is trying to solve a problem — Vodafone isn’t currently generating enough profit to justify the money that’s been invested in its network. The easiest way to understand this is by looking at the company’s net asset value per share. This has fallen from €3.35 per share in 2012 to just €1.91 per share at the end of March 2021.
Somehow, the group’s operations need to become more profitable. The plan is to do this by offering higher value services. However, there’s no guarantee this strategy will succeed. The mobile and broadband markets are very competitive and other companies are investing too. Improving profitability won’t be easy.
Vodafone share price: a bounce in September?
Despite my concerns about Vodafone’s profitability, I do like the business as an income investment. With the dividend yield sitting at 6.3%, I think the risks are balanced by the high yield that’s on offer. I would be happy to buy the shares for my high-yield portfolio.
However, my sums suggest that as things stand today, a fair value for this business would probably be around 130p. That’s only around 6.5% above the 122p share price I’m seeing as I write.
For this reason, I don’t expect the Vodafone share price to surge in September — unless the company’s performance improves more quickly than expected.
