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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.
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.
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.
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.
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.
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.
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