Can Vodafone Dial in to Higher Prices?

Vodafone (NASDAQ:VOD) is one of the largest telecommunications companies in the world with over 450 million customers. The company’s reach is largely concentrated in Europe, but it also owns a large interest in Verizon Wireless—the second largest mobile phone provider in the U.S. The stock is up a paltry 1 percent in the last 12 months; however, with several upcoming positive catalysts and an attractive dividend, is the stock a better investment than its recent returns indicate? Let’s use our CHEAT SHEET investing framework to decide whether Vodafone is an OUTPERFORM, WAIT AND SEE, or STAY AWAY.

C = Catalysts for the Stock’s Movement

Vodafone has been able to maintain exposure—albeit indirectly—to the healthy U.S. telecommunications market by way of a 45 percent stake in Verizon Wireless. Vodafone has benefited immensely from its position in Verizon Wireless, earning $8 billion in dividends from the company in the last two years. Parent company Verizon Communications (NASDAQ:VZ) has talked about possibly buying Vodafone’s stake in Verizon Communications for between $100 and $140 billion. While the two telecommunications giants haven’t talked formally about a deal, the current economic environment is right for both companies. A cash infusion of upwards of $100 billion would certainly be a positive catalyst for the stock.

Investors have raised concerns about Vodafone withholding a recent $2.1 billion dividend payment it received from Verizon. The company’s revenues were down 4.2 percent for the most recent quarter, while its earnings per share decreased roughly 3 percent. The declines were the result of a drop in service revenue from southern Europe, as consumers continue to struggle amidst an economic recession.

Vodafone recently announced the purchase of the biggest cable company in Germany, Kabel Deutschland, for $10 billion. The company believes the acquisition will boost operating synergies, and lead to around $400 million more in revenue per year. Kabel Deutschland has an extensive telecommunications infrastructure in Germany—one that Vodafone can piggyback off of for its mobile operations. The acquisition shows investors that Vodafone’s management is tackling its recent woes in Europe head on as it looks to increase operating efficiencies across the continent.

E = Excellent Performance Relative to Peers?

Vodafone has performed reasonably well compared with its two largest competitors AT&T (NYSE:T) and Verizon Communications. While the forward price to equity multiple is, admittedly, based on hypothetical earnings, Vodafone has the lowest of the group, implying that it is relatively cheap given its future earnings. Vodafone’s operating margin is second highest to Verizon’s at 12.33 percent; however, it may rise due to synergies created from the Kabel Deutschland acquisition. Most impressive is Vodafone’s dividend—yielding an attractive 7 percent and well above the industry average. The company has increased dividends by 7 percent in each of the last four years despite a fickle European economy.

VOD T VZ Industry
Forward P/E 11.40 13.36 15.75 N/A
Operating Margin 12.33% 10.11% 12.79% N/A
Growth Est. (5 yr.) 3.30% 6.36% 10.48% 6.86%
Dividend Yield 7.00% 5.00% 4.10% 4.80%

T = Technicals on the Stock Chart are Strong

Vodafone is currently trading at around $29.31, above both its 200-day moving average of $28.06 and its 50-day moving average of $28.78. The stock has experienced a strong uptrend since late February, and is up around 14 percent in the last six months. Recently, the 50-day moving average crossed over the 200-day moving average, implying strong investor sentiment. Vodafone is trading right around its 52-week high of $30.80.

 

Conclusion

Vodafone seems undervalued given that it is trading at a relatively low forward price to earnings multiple of 11.40, pays an industry-leading 7 percent dividend, and is exposed to several upcoming positive catalysts. There is downside risk in that the European economy—where the majority of Vodafone’s operations are located—will not recover as quickly as expected. Additionally, those bearish on the stock argue that Vodafone’s high dividend is not sustainable; however, there has been no evidence that its solid dividend history will cease. Given that investors can purchase exposure to several upcoming beneficial catalysts and a high dividend yield for a relatively low price, Vodafone is an OUTPERFORM.

Using a solid investing framework such as this can help improve your stock-picking skills. Don’t waste another minute — click here and get our CHEAT SHEET stock picks now.

More from The Cheat Sheet