Why I Bought Vodafone Last Week

LONDON -- It's the fourth-largest constituent of the FTSE 100 and a solid dividend payer, yielding 6%. So it's not surprising that Vodafone (LSE: VOD.L  ) (Nasdaq: VOD  ) is in many private investors' portfolios.

It was bad news all around, then, when Vodafone issued disappointing half-year results last week, causing its shares to drop 5%. They are now down 10% this year.

There are generally three things you can do when a core shareholding drops in value:

  • Hold your nerve, and the stock. In most cases, that's probably the best course of action for long-term shareholders.
  • Run for the hills and sell the stock in case it is starting on a slippery slope downwards. Sadly, that is sometimes the case.
  • Top up your holding and buy at what you hope to be a bargain price.

I was happy to top up my holding of Vodafone last week. I'll explain my reasons in more detail below, but in essence it was summed up by CEO Vittorio Colao's remarks:

We have continued to make progress on our strategic priorities over the last six months, with good growth in data and emerging markets in particular. In the short term, however, our results reflect tougher market conditions, mainly in Southern Europe. We remain very positive about the longer term opportunities.

If the CEO is to be believed, it's a short-term setback in a long-term positive trend. That could be a buying opportunity.

The headwinds are certainly strong, and they're mostly caused by the mess known as the eurozone. The company was plunged into the red by a 5.9 billion pound writedown of its Spanish and Italian operations, where it now sees lower growth and higher risk.

At an operational level, revenue in Southern Europe was down 10%, with the decline accelerating in the second quarter. With margins eroded in Italy, Greece, and Portugal (though maintained in Spain), Southern European EBITDA was down 15%.

Vodafone's geographically diversified performance is a microcosm of the global economy. While Southern Europe was battered, the Northern and Central European division delivered indifferent growth of 1.5%, while the Africa, Middle East, and Asia-Pacific division saw stronger 5% growth.

Overall, it wasn't a pretty set of results. The writedown helped turn an adjusted operating profit of 6.2 billion pounds into a 1.9 billion pound loss after tax.

So why am I still bullish?

First, I'm happy to discount the write-off. Vodafone's balance sheet is bloated with intangible assets -- the legacy of overpaying for acquisitions by previous management -- and it's no bad thing to see some of it confined to the accounting wastepaper bin.

Secondly, the dire situation in Southern Europe is hardly new news. Significantly, Vodafone did not reduce its full-year guidance.

Thirdly, Vodafone will receive a 2.4 billion pound dividend from its U.S. associate Verizon Wireless (NYSE: VZ  ) . It will use 1.5 billion pounds of that to buy back shares, which will boost future earnings per share by about 1%. Vodafone only owns 45% of Verizon Wireless and is at the mercy of its U.S. partner, but the business is doing well as the U.S. economy recovers and 4G takes off. One way or another, it's a major source of value to Vodafone.

In addition, the company is progressing its strategic objectives:

  • Generating value from data services.
  • Pushing emerging-market penetration
  • Growing its enterprise business.
  • Standardizing operations to reduce costs.

Data revenue grew 6% in the face of a 13% decline in voice and messaging revenue and now makes up 16% of the total. The AMAP region contributed 30% of EBITDA, but the potential looks huge: More than 260,000 of Vodafone's 400,000 mobile customers are in this region.

In the enterprise segment, the company is integrating its acquisition of Cable & Wireless Worldwide, which it picked up for a song: Goodwill was just 170 million pounds out of a total cost of more than 1 billion pounds. And the company is targeting a 300 million pound reduction in its cost base.

Good company
Finally, I know that I'm in good company: Invesco Perpetual's Neil Woodford has about 10% of his high-yield portfolios riding on Vodafone. Woodford is a renowned stock-picker whose funds are built on large, established companies that generate healthy cash payouts. Remarkably, he enjoyed a nine-year run from 2000 to 2008 when he consistently beat the FTSE All-Share index. And in 2011, his funds returned double the index.

You can find out more about how Woodford goes about picking stocks in this special report from the Motley Fool: "8 Shares Held by Britain's Super Investor." It's free, and you can download it by clicking here.

Note that Vodafone's stock goes ex-dividend on Nov. 21.

Tony owns shares in Vodafone. The Motley Fool has recommended shares in Vodafone. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

Read/Post Comments (0) | Recommend This Article (6)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2121928, ~/Articles/ArticleHandler.aspx, 10/21/2016 8:02:33 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated 10 hours ago Sponsored by:
DOW 18,162.35 -40.27 -0.22%
S&P 500 2,141.34 -2.95 -0.14%
NASD 5,241.83 0.00 0.00%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

10/20/2016 4:00 PM
VOD $27.82 Down +0.00 +0.00%
Vodafone CAPS Rating: ****
VZ $49.14 Down +0.00 +0.00%
Verizon Communicat… CAPS Rating: ****