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Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 71% of retail investor accounts lose money when trading spread bets and CFDs with this provider. You should consider whether you understand how spread bets and CFDs work, and whether you can afford to take the high risk of losing your money.

Vodafone shares rising 11 times faster than the FTSE 100 in 2022

Vodafone’s share price began 2022 at 115p, before rising by 22% to 140p on 16 February. Having dipped back to 128p today, it’s still up 11% year-to-date.

The fact that Vodafone's (LON: VOD) share price is outpacing the UK’s premier index may surprise some investors.

While the FTSE 100 is jam-packed with oil majors, banks, and housebuilders which are all benefitting from the current geopolitical and monetary environment, it’s only up 1% so far this year.

And despite its high debt, the company’s share price trajectory combined with expected free cash flow of €5.3 billion this year suggests Vodafone shares may still be undervalued.

Vodafone share price: high debt and valuable assets

Vodafone shares were worth 237p at the start of 2018, and as little as 103p in October 2020. Yet while revenue has declined, profits before tax have increased from €2.7bn to €4.4bn over the past five years.

But as a telecoms stock, many hold Vodafone stock for the consistently high dividends rather than for a steady share price. With its 6% dividend yield, over 80% of the Vodafone shares are held by institutional investors.

Indeed, the company’s investment case is centred around its ‘strong dividend yield grounded in a resilient, subscription-based business model that’s supported by a pan-European footprint and structural digitalisation in our African markets.’

Accordingly, this year’s sharp share price increase is down to the potential rearrangement of its international affairs. Stakeholder Cevian Capital AB is pressuring Vodafone to sell off its underperforming units in Europe, with service revenue falling by 1.3% in Italy and 1.6% in Spain in Q3.

But in February, it rejected an €11 billion bid for its Italian business, which controls 28% of the country’s market, by French operator Iliad and private equity operator Apax. Vodafone argued the sale would not be in the interest of shareholders.

However, it’s also in advanced discussions over the sale of its 21% stake in Indus Towers, India’s largest mobile company.

A key concern for institutional investors is the depressive effect of Vodafone’s colossal €73bn debt mountain amid the tightening monetary environment. Some argue the trade-off between increased financial stability and its ability to continue paying above-average dividends could be worthwhile if Vodafone sells some underperforming assets to tackle the pile.

M-Pesa: pivot to Africa?

This is because Vodafone can afford to sell off some businesses, and maintain high dividends, if it’s able to continue explosive growth in Africa.

In Q3 results, total service revenue rose by 0.4% to €9.37 billion, and by 1% in key market Germany. CEO Nick Read was ‘pleased the group returned to service revenue growth in the third quarter as a result of the continued commercial momentum across our business, including our largest market Germany.’

The FTSE 100 operator bought out Liberty Global operations in Germany, Hungary, Romania and the Czech Republic for €19 billion in 2019.

And the CEO’s operational priorities are ‘to strengthen commercial momentum in Germany, accelerate our transformation in Spain and position Vodafone Business to maximise EU recovery funding opportunities.’

This is unsurprising, given that Europe currently accounts for 52% and Vodafone Business 27% of service revenue. The company is already benefitting from EU Recovery funding programmes including ‘the Recovery & Resilience facility, which combines €386 billion of loans and €338 billion of grants available to European Union Member States.’

But it's Vodafone’s operations in Africa and Turkey are the most encouraging, despite representing only 16% of service revenue. Revenue growth hit 18.5% in Egypt and 22% in Turkey in the quarter.

Moreover, Vodafone claims to be ‘the leading provider of mobile data and mobile payment services’ in Africa, with ‘over 187 million mobile customers in 8 African markets, which represent over 40% of Africa’s total gross domestic product.’

Further, its M-Pesa financial services platform ‘processed 5.3 billion transactions, an increase of 26% year-on-year.’ And the ‘VodaPay ‘super-app’ launched in South Africa in October 2021, and reached over 1.4 million downloads and more than 1.0 million registered users by the end of Q3.’

In addition, Read emphasised that of ‘strategic portfolio priorities, we have made very good progress in terms of Egypt moving into Vodacom. It got unanimous approval’

With FY22 results due on 17 May, an internal investment recalibration could see Vodafone shares continue to outperform the FTSE 100 index.

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This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.

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