Analysts continue to back Vodafone as latest update delivers positive outlook

7th February 2014

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Vodafone’s latest market update was buoyed by an upbeat tone and today analysts at Citigroup and Deutsche reiterated their respective ‘buy’ recommendations on the firm’s shares writes Philip Scott.

While sales were subdued, the group’s quarterly results were in line with City expectations and the firm confirmed its guidance for the full financial year to 31 March 2014 with adjusted operating profit of around £5bn and free cash flow of £4.5bn to £5bn.

Jonathan Jackson, head of equities, at broker Killik & Co, who also rates the stock a ‘buy’, says: “The shift to 4G is gaining momentum and the company has seen improving mobile customer net addition trends. Management is therefore optimistic that the group’s revenue performance will begin to improve as regulatory headwinds ease and customer appetite for video and content services increases.”

The past year has seen the FTSE 100 listed firm’s shares advance by 31% but on the back of the recent market volatility, the shares have dropped by 3% over the last three months, which some my see as a buying opportunity.

“Vodafone intends to pay a dividend of 11p for the year to March 2014, 8% higher than the previous year, and has committed to annual growth in dividends further out. At the current share price, this equates to a progressive yield of 5%,” adds Jackson.

In September last year, the group announced an agreement to dispose of its US group, whose principal asset is its 45% interest in Verizon Wireless, to Verizon Communications, Vodafone’s joint venture partner, for $130bn (£84bn).

The deal has now been approved and completion is expected on 21 February. Some $84bn – a massive 71% of the proceeds – are being returned to shareholders through a combination of cash and Verizon stock. On completion, Vodafone shareholders will receive a combination of Verizon shares, new Vodafone shares and cash.

Without the US assets, 70% of Vodafone’s revenue will be generated in developed markets, such as Germany, the UK, Italy and Spain. The rest, at circa 30%, will come from emerging markets, such as India and South Africa.

Looking ahead to the ‘new’ Vodafone, Jackson says: “Vodafone’s strategy will continue to reflect the expected acceleration of smartphone adoption and data usage, and the group will continue to pursue its leadership strategy in mobile and unified communication services for consumers and enterprises. During the latest quarter, the group embarked upon its organic investment programme, Project Spring, to establish further network and service leadership through additional investments.

“It is planning to spend an additional £7bn by March 2016 in areas such as accelerated 4G network build, deeper 3G coverage and capacity in mature markets, and increased investment in mobile payment services. We believe this investment, which represents an incremental 50% increase, will enhance the group’s competitive position at a time when many of its rivals are cash-strapped, and help to increase its market share.”

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