Regency

RESEARCH
AUGUST 2022

Vodafone
Is Now the Right Time to Buy?
 Vodafone (VOD)

Locking-in a large dividend

Vodafone (VOD) is often lumped in with BT when it comes to analysis, but in reality, it has much higher levels of
geographic diversification making it, in our opinion, a superior stock…

BT’s fortunes are largely tied to the health of UK plc,

whereas only 15% of Vodafone’s revenue comes from the UK
with the rest generated in continental Europe and Africa.

Vodafone’s African business has exciting growth potential

while the overall business generates substantial and stable
cashflows, making its 6.32% forward dividend yield look very
attractive.

In this report, we’re going to look at why now is a compelling

time to lock-in Vodafone’s large dividend.

High-growth Africa and high-margin Germany

The African mobile telecom market is much larger and substantially higher growth than the mature European
market…

In the last year, African mobile customers increased 37% to 184.5m – this is more than double the size of Europe’s
66.4m mobile contract customers.

Alongside its African mobile contracts, Vodafone also has a

payment platform called M-Pesa which allows its African
customer base to manage business transactions and
regular payments. In 2021, M-Pesa users in Africa jumped
from 48.3m to 52.4m – hitting its 50m target three years
ahead of schedule.

In Europe, the jewel in Vodafone’s crown is the German

market which accounts for 30% of group revenue.

The German market has profit margins of 43%, double that

of the UK’s 21%. However, UK profit margins may be set to receive a boost should the high-profile merger of
Vodafone UK and Three UK go through.

So, whilst Vodafone is by no means a growth stock (headline revenue has remained flat for the last five years), it has
a geographically diversified base of cash generative business which serves to protect its status as a generous income
investment.

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 Vodafone (VOD)
Preliminary Results prove ‘resilient’

In May, Vodafone released an in-line set of Preliminary Results for full year 2022…

Full year revenue rose 4% to €45.6bn reflecting growth in Europe and Africa Service revenue. And Total Service
revenue edged 2.6% higher to €38.2bn.

Underlying cash profits rose 5% to €15.2bn which was “in-line with previous guidance”.

Nick Read, CEO, highlighted the group expects to deliver “resilient” performance in the new financial year, including
adjusted earnings (EBITDA) of €15–€15.5bn, but warned that Vodafone isn’t immune to the wider macroeconomic
challenges.

The results come just days after Emirates Telecommunications Group Company (‘Etisalat’) became Vodafone’s
largest shareholder with a 9.8% stake…

Etisalat cited Vodafone’s “geographically diversified business” and “attractive valuation” as reason for the
purchase. It also confirmed it doesn’t want a board seat and has no current interest of making a takeover bid.

Market-beating dividend yield

Vodafone’s prelims also confirmed a final dividend of 4.5 cents was announced, taking the full year payment to 9
cents (7.487p per share).

The dividend history and projection chart (below) shows that Vodafone’s generous dividend is forecast to steadily
rise over the next five years.

Dividend cover is forecast to remains around 1.2 x earnings and free cash flow is projected to rise in 2024 – giving
Vodafone a free cash flow yield of 13.2%.

The shares currently trade on a forward Price to Earnings (PE) multiple of 13, which looks attractive when
compared to forecast earnings per share (EPS) growth north of 20% and market-beating forward dividend yield of
6.32%.

VOD Dividend History and Forecast (source dividendmax)

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 Vodafone (VOD)
Add some precision to your market timing

Vodafone is often bought for its income characteristics, but there are some short-term technical levels which may
help you add some precision to your market timing…

Recent price action has seen Vodafone’s share respond to short-

term resistance at approx 128p and short-term support at approx
112p.

These clearly defined structure levels can be used to help time

your entry…

The closer prices move toward key support, the more compelling
the stock becomes as a buying opportunity.

Likewise, the close the shares move to resistance, the more it’s
wise to wait and see if resistance can be broken before buying in.

If you’re looking to invest over the long-term, adding some precision to your timing can potentially help to squeeze
an extra couple of percent out of your total return.

VOD 3-Year Chart

MARKET CAP: £34.11bn

SECTOR: Telecoms

PE (f) 13.00

DIVI YIELD (f) 6.32%

EPS GROWTH (f): 25.3%

Source: TradingView

SUMMARY:

◉ Vodafone has high levels of geographic diversification and higher margins than many of its key competitors

◉ The African mobile telecom market is much larger and substantially higher growth and the mature European market

◉ UK profit margins may be set to receive a boost should the high-profile merger of Vodafone UK and Three UK go through

◉ On the price chart, there is short-term resistance at approx 128p and short-term support at 112p

◉ Vodafone’s generous dividend is forecast to steadily rise over the next five years

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