I'm not the only investor who has been wondering whether to hang up on global mobile phone giant Vodafone lately. After investment maestro Neil Woodford rang off earlier this month, plenty of us have been asking whether to follow his lead. But is Vodafone really dialing all the wrong numbers?
Can't see Woodford the trees
Woodford sold a day after Vodafone's most recent trading update, which reported a 5.2% fall in revenue in the final quarter, with particularly sharp falls in Italy, Spain, and the U.K. Vodafone also faces major challenges in the shape of Indian tax wrangles, regulatory overhang, and tough competition. Yet it wasn't all bad news. Group data revenue rose 13% to 1.7 billion pounds, and Vodafone's share of emerging markets looks healthy, especially in India and Turkey. Verizon Wireless, its joint venture with Verizon, punched out a 2.4 billion pound dividend, cutting Vodafone's net debt to 23.3 billion pounds. Vodafone Red, its new European pricing package, has made a promising start. The company still pumps out cash and is now buying back 1.5 billion pounds' worth of shares. In fact, the market preferred to look on the positive side, and Vodafone rose 2% in response to the results. Woodford was in a minority. Trouble is, when that happens, the majority is usually wrong.
Krupp and Kabel
Woodford isn't the first investor to wonder about Vodafone. Its share price has been moribund for years, and is down 6% over the last 12 months, against a 7.6% rise on the FTSE 100 as a whole. Woodford is said to be worried about future growth prospects, but it's a long time since Vodafone could be called a growth stock. It has gradually morphed into a defensive utility, and with projected EPS growth of 2%, 7%, and 6% over the next three years, that doesn't look likely to change. To offset this, it has been busily lining up new business, including a new contract with mining and metals company ThyssenKrupp, a five-year cyber security tie-up with BAE, and a potential 1.1 billion pound takeover bid for Kabel Deutschland.
I yield to Vodafone
I've held Vodafone for years, but when I heard a long-standing investor of Woodford's pedigree had cut his connection, I started to question my own loyalty. Where can a company of Vodafone's size go from here, after all? At some point, the world will be saturated with mobile phones, although we're not there yet. At that point, growth will be a struggle, especially when you're as big as Vodafone. That said, you aren't paying for growth, at a modest valuation of 10.9 times earnings. So I won't be selling. Few other investments will pay me 5.8% a year right now. That yield, which is covered 1.7 times, is 66% higher than the FTSE 100 average of 3.5%. Vodafone remains a strong core income generator for me; I can get the growth elsewhere.
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Harvey Jones owns shares of Vodafone. The Motley Fool recommends Vodafone. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.