Is Vodafone Group an Exciting Emerging-Market Play?

LONDON -- While crippling austerity in Europe and fiscal obstacles could put the brake on growth rates there, in developing regions a backdrop of accommodative central bank action, elevated commodity prices, and rising personal affluence levels have created an environment of exceptional commercial opportunity.

The divergence between the growth prospects of traditional and developing markets is borne out by latest growth projections from the International Monetary Fund, which expects developing nations and emerging markets to expand 5.3% and 5.7% in 2013 and 2014, respectively. By comparison, it anticipates that the U.S. economy will rise 1.9% this year and 3% in 2014, while eurozone GDP is forecast to dip 0.3% in 2013 before rebounding just 1.1% next year.

Bubbly activity in these developing geographies can create large opportunities for many London-listed firms. Today, I am looking at Vodafone  (LSE: VOD  ) (NASDAQ: VOD  ) and assessing whether its operations in these regions are likely to underpin solid earnings growth.

Emerging market growth strong but slipping
Vodafone's interims in February revealed that group service revenues slipped to 10.4 billion pounds in the October-December period last year, representing a 2.6% annual fall on an organic basis. This was driven mainly by declines in Southern Europe, which slipped 11.9% from the corresponding 2011 period, while organic revenue from Northern Europe also slipped 0.9% in the third quarter.

In comparison, organic growth from Africa, the Middle East, and Asia-Pacific (AMAP) regions grew 2.9% during October-December, to 3.1 billion pounds. Group service revenues from these areas account for 30.3% of the company total, up half a basis point from 29.8% in the same three months of 2011.

However, growth has stalled in these regions recently -- indeed, organic expansion in the third quarter was down markedly from growth of 7.6% growth recorded in AMAP territories in October-December 2011. The implications of new subscriber verification rules, and regulations pertaining to messaging and processing fees, have pushed Indian growth much lower in recent months, while economic difficulties in South Africa have harmed new customer additions there.

The company continues to work tirelessly to identify lucrative opportunities in promising, far-flung regions, however, and I am a firm believer in Vodafone's ability to squirrel out excellent earnings prospects to turbocharge growth in developing regions once again.

Last month Vodafone announced last month that it had signed an accord with China Mobile in order to form a consortium to create a mobile telecoms license in Myanmar. The country is looking to significantly transform its mobile sector, including doubling the number of operators there to four, and provides massive growth potential -- Vodafone estimates that less than 10% of the 60-million-strong population are not yet mobile users, and puts annual GDP growth there at 5.5%.

So is Vodafone a buy?
City analysts expect earnings per share to have increased 2% in the year ending March 2013, to 15 pence, results for which are due on Tuesday, May 21. Earnings are expected to rise 8% and 6% in 2013 and 2014 respectively, to 16 pence and 18 pence.

Vodafone has a solid, multi-year track record of building dividends, and this is expected to keep on rolling. Last year's payout around 9.5 pence per share -- excluding a special 4 pence dividend from Verizon Wireless -- is anticipated to rise to 10.4 pence per share for March 2013, before increasing to 10.8 pence per share in 2014 and 11.1 pence per share in 2015.

And dividend yields for the current year and next come in at 5.5% and 5.6% respectively, comfortably clear of an average prospective yield of 4.5% for the mobile telecommunications sector, and 3.2% average for the FTSE 100.

Vodafone currently deals on a P/E rating of 11.9 and 11.2 for 2014 and 2015 correspondingly, comparing favorably with a forward earnings multiple of 13.2 for the entire mobile telecommunications sector. In my opinion the mobile giant's galloping pan-global presence bodes well for future earnings growth, while increasingly juicy dividend prospects make it a standout pick for income investors.

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