Vodafone Sees Strong Emerging Markets Growth

Published in Company Comment on 22 July 2011

First-quarter results show Europe struggling, but nice growth elsewhere.

Vodafone (LSE: VOD) may be the world's biggest mobile phone operator, but that hasn't immunised it against the economic woes besetting some of Europe's struggling economies, as we learned from the company's first quarter update on Friday.

A fall off in demand from some southern European countries has led to growth in service revenues slowing, and that has been compounded by a reduction in mobile charges with some countries' regulatory bodies cutting mobile termination rates.

So a quarter which saw rising sales of smartphones, like the Apple (NASDAQ: AAPL.US) iPhone and Google (NASDAQ: GOOG.US) Android phones, only brought Vodafone a 1.5% overall increase in revenues, after the previous quarter saw 2.5% growth. But that was still a bit better than most had been expecting.

Europe struggling

Organic European revenues actually fell, by 1.3%, with sales in Spain falling by nearly 10%. But that was nicely countered by a 32% rise in sales in Turkey, with India recording a jump of 17%. Organic revenue from the Africa, Middle East and Asia Pacific region was up by 8.7%, with sales at Vodacom in South Africa growing by 7.8%.

And Germany and the UK held up reasonably well too, with the former pretty flat at 0.2% growth, and the latter up 1.7%.

Vodafone says the results were as expected and is sticking to its existing full-year guidance of an operating profit between £11bn and £11.8bn, with chief executive Vittorio Colao saying...

"We have made a good start to the year, reporting robust results despite challenging macroeconomic conditions across southern European economies and the impact of cuts to mobile termination rates. Revenue from our key focus areas of data, enterprise and emerging markets continues to grow strongly. With our broad geographical mix and improving market positions, we are well placed for the rest of the financial year."

Dividends to come

Vodafone's forecast dividend yield stands at around 5.8%. With Vodafone telling us that its free cash flow for the quarter of £1.3bn is supporting its dividend target, and with full year expectations of £6bn to £6.6bn of the stuff flowing in, the chances of that not happening seem pretty slim. It's amongst the best of the big dividends on the market at the moment.

After selling off its 44% stake in French operator SFR for the sum of £6.8bn, Vodafone has seen its net debt figure fall to £23.1bn. That might sound like a pretty eye-watering sum, but it is less than a third of the company's total market capitalisation of £82bn. And that bit of cash isn't going to be hanging around for long anyway, with a share buyback of £4bn underway, which is already 10% complete.

Some might prefer a bigger attack on the debt figure, while others might like a dividend boost, but the board can presumably see the same attraction in the current share price as can those canny dividend investors who are tucking a few away in their income portfolios.

Minority stakes

And there could be a nice bit of extra cash coming Vodafone's way in the not too distant future too, from its 45% share of Verizon Wireless. Majority shareholder Verizon Communications (NYSE: VZ.US) has so far been concentrating on paying down its debts, but its second quarter results are due the same day and observers will be hoping for some news on the commencement of dividends.

Further disposals and acquisitions were announced during the quarter, with the sale of Poland's Polkomtel to go ahead, while Vodafone has reached an agreement for the purchase of a further 33% chunk of Vodafone Essar in India, continuing the company's strategy of pulling out of minority-stake telcos and concentrating on its major holdings.

All in all, I reckon these figures underline the strength of Vodafone. Despite the tough local European economy, Vodafone will almost certainly do better than most of the continent's mobile operators, and it's clearly managing its emerging markets business pretty well, too.

The shares look cheap to me.

More from Alan Oscroft:

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ANuvver 22 Jul 2011 , 12:50pm

Just bit the bullet on more VOD. Hoping for a bit of a bump to help it on its way when America wakes up (re Verizon).

DIYIncome 22 Jul 2011 , 6:59pm

I'm holding VOD primarily for the dividend - but showing capital gain of 4-5 year dividend payments (which is when I start to think about selling).

As for share buybacks with the proceeds of sales of assets - naughty management (it's your bonuses your after): pay off debts first please! (and then up the dividend!)

ANuvver 23 Jul 2011 , 7:26pm

Yup, I like Voda for income, but I also see modest long-term growth.

A buyback programme can provide a bit of an airbag under the price to encourage new money. I'm not so concerned about indebtedness on a corporate level as long as they seem to be borrowing at responsible levels and for good reason - eg ULVR in China.

As to Voda, I think the buybacks are part of a process of realignment after a spate of irresponsible and costly empire-building under Sarin.

So - you flag investments for attention when cap gain approaches 4-5x annual dividend? Interesting. Care to elaborate?

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