Vodafone - yield machine or value trap?

Vodafone: As we all know, the group is a mobile telecom giant, balancing on the shifting sands of an industry enthralled by the move to quadplay. One consequence is that Vodafone is having to invest, belatedly, in cable and fibre fixed line infrastructure (e.g. Kabel Deutschland) to help support the explosion in data usage. For most equity income managers, the stock is such a large index constituent that they will have some in their portfolio. Neil Woodford is an exception, so what is he missing out on? Well, these in-line annual results to 31^st March 2015 look a bit messy as they see the dust settling post the Verizon Wireless disposal. Revenues were up 10.1% (-0.8% organic), EBITDA up 7.5% to £11.9bn (-6.9% organic, blame Europe) and adjusted eps were down 27.8% at 5.55p (blame increased depreciation and amortisation). The total dividend was raised by 2% to 11.22p. There was positive free cash flow of £1.1bn, with net debt of £18.7bn. So the net debt to EBITDA ratio is a comfortable 1.6x, whilst on a market cap. of £60.2bn the EV/EBITDA is 6.6x. The group ended the year well with a return to organic growth in the fourth quarter, helped by some chinks of light in hitherto gloomy European markets. 

Looking forward, the £19bn, two year long, Project Spring continues, with further benefits to come, with FY2016 “guidance” EBITDA forecast to tread water in the £11.5bn to £12.0bn range against £11.7bn in FY2015. Free cash flow is again expected to be just positive after capex, with an intention to grow the annual dividend. In quadplay Vodafone appear, to me, to be lagging. In the UK for example they are just ramping up for the launch of a broadband offering and a subscription TV service, which all feels like a catching up exercise rather than a ground-breaker. In addition the proposed BT/EE tie-up will be a further competitive threat in their core mobile market. So there are ongoing industry threats to the P&L and in FY2016 little EBITDA growth. A PE of c40x is no great valuation tool, but the EV/EBITDA of 6.6x is reasonable. There is little to get excited about here, but if the dividend moves up, say 2.5%, to 11.5p, then the yield at 230p is a tempting 5%. In an income hungry world that yield is enough to attract many professional (index watching) investors. The justification for declaring the stock to be a value trap would be a worry that the EBITDA, which supports the dividend, cannot be grown reliably in such a fluid and competitive telecommunications market. (Neil Cumming^, 19^th May 2015)

These comments are not a personal recommendation to deal. Any investments can fall as well as rise in value, so you could get back less than you invest. I may have a financial interest in some of the stocks written about. www.dividendpower.co.uk or e-mail at info@dividendpower.co.uk  Twitter:  @DividendPower