The Vodafone Group (LSE: VOD) share worth rose on Friday morning, after the FTSE 100 telecoms large issued a sturdy buying and selling replace.
My investing objective is to construct a portfolio that gives a rising, passive earnings. Vodafone’s 6.6% dividend yield makes it a tempting selection, however can the corporate keep, or improve, this payout over time? I’ve been taking a recent look.
Europe is bouncing again
Vodafone’s income rose by 5.7% to €11,101m in the course of the quarter to 30 June. Much of this improve appears to be pushed by the reopening commerce. Revenue from roaming fees rose by 56% in the course of the interval — though they have been nonetheless 54% decrease than earlier than the pandemic.
Income from the group’s enterprise prospects additionally rose, with a 2.7% improve in service income.
The restoration nonetheless has a method to go, but it surely appears persons are on the transfer once more. I count on additional beneficial properties over the following six months, assuming the pandemic continues to ease.
Africa appears thrilling
I’m happy to see Vodafone’s European operations additionally return to progress. But the truth is that European telecoms networks are pretty mature companies. Populations aren’t getting a lot greater and most of the people have already got cellular and broadband companies.
Looking forward, I reckon the thrilling progress alternative is in Africa. Vodafone is without doubt one of the largest cellular operators on this market, masking 67% of the continent’s inhabitants.
The numbers are enormous. Over the final yr, the variety of Vodafone cellular customers in Africa has risen by 10% to 181.6m. By comparability, Vodafone solely has 65.6m cellular prospects in Europe.
The firm additionally has one other large progress engine in Africa — the M-Pesa cellular cash enterprise. In international locations the place many individuals don’t have entry to banking, cellular cash is large enterprise. M-Pesa dealt with 4.5bn transactions over the past quarter, serving virtually 50m prospects.
Vodafone shares: why so low cost?
Vodafone shares provide a 6.6% dividend yield. This is way increased than a lot of the different large telecoms shares on the UK market. For instance, BT has a forecast yield of 4.1%. Africa-only operator Airtel Africa yields 4.3%.
A better yield suggests Vodafone shares are rated extra cheaply than rivals. Why?
Vodafone generates loads of money — actually sufficient to assist its dividend. The newest steering from the corporate is for free money movement of “at the very least €5.2 billion” this yr. That’s sufficient to pay the present dividend twice over.
One drawback is that Vodafone should additionally preserve spending on new infrastructure and companies. Historically, this hasn’t at all times been very worthwhile.
CEO Nick Read admits that Vodafone’s returns haven’t coated the group’s price of capital in recent times. In plain English, that’s a bit like renting out your home, however not producing sufficient earnings to pay the mortgage.
Read reckons he can repair this drawback by slimming down the group’s operations and including extra worthwhile digital companies. But he nonetheless has some method to go, for my part.
My verdict? If I wished a good passive earnings at this time, I’d buy Vodafone shares for their 6.6% yield.
But if I was investing for a retirement earnings sooner or later, I’d look for a enterprise with stronger progress credentials. I can see some threat that Vodafone’s dividend can be value much less in 10 years than it’s at this time.
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Roland Head owns shares of Airtel Africa Plc. The Motley Fool UK has no place in any of the shares talked about. Views expressed on the businesses talked about on this article are these of the author and due to this fact could differ from the official suggestions we make in our subscription companies akin to Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we imagine that contemplating a numerous vary of insights makes us higher traders.