The Stock Picker's Guide to Vodafone Group

LONDON -- Successful investors use a disciplined approach to picking stocks, and checklists can be a great way to make sure you've covered all the bases.

In this series I'm subjecting companies to scrutiny under five headings: prospects, performance, management, safety, and valuation. How does Vodafone  (LSE: VOD  ) (NASDAQ: VOD  ) measure up?

1. Prospects
One of the world's largest mobile providers, Vodafone enjoys wide geographic diversification. Though its sector is fundamentally defensive it is economically sensitive. Thus revenues are sluggish in Northern Europe, dire in Southern Europe, and growing in emerging markets and the U.S. (through Verizon Wireless).

Vodafone's future strategic direction depends on the fate of its 45% interest in Verizon Wireless. With estimates of its worth over $100 million, 70% of Vodafone's total market cap, and majority shareholder Verizon Communications keen to buy out its partner, a deal could leave Vodafone bursting with cash but shorn of its biggest cash flow generator.

That could help it address its biggest strategic weakness: lack of a fixed line infrastructure to enable it to offer bundled services. Acquisition of cable operators, such as Kabel Deutschland, would be one solution.

2. Performance
The year to March 2013 saw the first reversal of revenue growth for at least eight years. Operating profit has been bumpy over that period largely due to impairments on Vodafone's acquisitions, but underlying earnings have tracked upwards. Nevertheless, operating margins have trended down over that time, as regulatory and competitive pressures took effect.

Dividends have maintained a strong upwards trend with cover varying between 1.5 times and 2.5 times.

3. Management
CEO Vittorio Colao has largely eschewed the strategy of growth by acquisition pursued by his predecessors, and has streamlined the group with sales of minority interests.

How he handles Vodafone's interest in Verizon Wireless and the cash proceeds from any sale will determine his legacy.

4. Safety
Vodafone's net gearing is a modest 37%, covered three times by its own earnings.

Much of the balance sheet's 72 million pounds of net assets represent goodwill and intangibles, but 38 billion pounds of investments in associates vastly undervalues the Verizon stake.

Last year Vodafone's own operations threw off 14 billion pounds of cash, but capex and fixed costs left just 2 billion pounds of free cash flow. As in the previous year, Vodafone had to use its dividend from VZW to fund its own 5 billion pound dividend.

5. Valuation
Despite being chased up by bid speculation, at 190 pence Vodafone's shares are trading on a market average P/E of 13. Yielding 5.4%, management has toned down its dividend policy to the very modest aim of at least maintaining the current payout.

Conclusion
Struggling in several markets and with some unsolved strategic issues, Vodafone's reliability as a dividend generator is getting shakier. But the jewel in its crown, Verizon Wireless, justifies current valuations.

Whether or not you have shares in Vodafone, if you're interested in income stocks I recommend you have a look at the Motley Fool's top income pick for 2013. It's yielding over 5% and should be one of the safest on the market. It's in my portfolio and I expect to hold it for a long time.

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  • Report this Comment On June 11, 2013, at 12:49 PM, karlsmq wrote:

    att does not seem to have vision, att will not be allowed to acquire anything inside the USA their hugr opportunity is staring them in the face, VODAFONE ,att will expand in a big way by acquiring VODAFONE and become a world operator overnight.they can offer cable phone service worldwide, ofcourse they have to sell their verizon share back to verizon.but do they have the vision? companies without vision eventually they will marginalized .

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