Ten iconic UK shares: Vodafone

The next in our series of articles using fundamental analysis to examine the prospects of 10 iconic FTSE companies.

Vodafone logo
Source: Bloomberg

Reasons to watch

  1. Future growth in customers using faster data plans
  2. Strong dividend payout
  3. Potential for new acquisitions to bolster offering


Vodafone’s name is traced back to 1982 when the largest maker of military radio technology in the UK, Racal, began a joint venture with another firm, Millicom, called ‘Racal Vodafone’.

Vodafone was demerged from Racal in 1991 and began its expansion into mobile telecoms. It acquired Talkland and then bought out store chain Peoples Phone in order to take control over both the network and the sale of phones.

Its real expansion began when, having gained 35% of German firm Mannesmann, it made an unsolicited bid for the company in 1999. Mannesmann had purchased Vodafone’s UK rival Orange, breaking a perceived agreement not to compete on each other’s home ground. Eventually Mannesmann agreed to the deal, worth £112 billion, then the largest ever corporate merger.

It continued to buy up firms, including Cable & Wireless Worldwide in 2012, and then Spain’s largest cable operator, ONO, in 2014. The sale of its stake in Verizon Wireless to Verizon Communications was also a major event, netting Vodafone around $130 billion. 

Fundamental analysis*

Earnings from Vodafone were well-received by the market, with the shares rising following the news. The company said that it saw increasing evidence of stabilisation in a number of markets, while the earnings forecast was increased, to a £11.6-11.9 billion estimate, from the previous £11.4-£11.9 billion forecast. Increasing investment in faster networks is beginning to pay off, and with only 6% of customers in Europe on the faster data plans (which cost more and thus boost margins), the company looks set to enjoy further growth in this area.

Vodafone is perhaps the dividend payer par excellence. It has to be, since the shares have fallen steadily this year, down 12% versus a 5% drop for the FTSE 100 and a 4% fall for BT. Still, it trades on a dividend yield of 6.85%, well ahead of the global sector average of 3% and BT’s 3.13%.

Recent news on the product launch front could be a long-term positive catalyst for the shares. By offering Sky’s NowTV to 4G subscribers, Vodafone will have a chance to tempt people to subscribe to more expensive data plans, boosting margins from existing clients as well as providing an incentive for other users to switch to Vodafone.

This is the kind of development that can help offset the loss of the Verizon cash cow. Since Verizon was sold Vodafone has been in search of a real replacement. Small deals like the NowTV agreement help but they only go pat of the way. What Vodafone really needs to do is sort out its Kabel Deutschland acquisition, while providing greater clarity on profit expectations than has hitherto been the case. The Kabel deal could be big news, but a lawsuit by an activist investor could see the company landed with a hefty bill if the court rules against Vodafone.

The year 2013 was a good one for Vodafone shares, but 2014 has been almost a mirror image. At one point it traded as low as 180p, before rebounding to 210p. However, the downtrend from 250p, the February/March high is still intact, with the 200-day moving average containing any gains to the upside. The 210p level was significant resistance in September and looks to be doing the same job once again, so any drop lower targets 190p, which has provided good support in recent months, even if it was briefly breached in mid-October.

*What is fundamental analysis?

Fundamental analysis seeks to examine a security by measuring its value through the use of financial and qualitative factors. Essentially, fundamental investors believe that each share is a piece of a company, and that the company can be analysed to determine whether the current share price indicates whether the company itself is undervalued (trading at a discount) or overvalued (trading at a premium).

The overall objective is to determine the underlying value of a company, and use comparisons with similar companies to determine if the business is likely to be successful or otherwise. Crucially, a company cannot be overvalued or undervalued in isolation. Instead, fundamental analysis compares a company to its peers in the sector, to the broader market, and to past valuations, to determine whether the current valuations are appropriate. 

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