Vodafone is a mobile telecommunications service provider with operations across the globe. The mobile telecommunication business should grow steadily over the coming decade as smartphone penetration is still low and data usage is set to mushroom.
Vodafone trades with a 7.5% dividend yield and a greater than 10% free cash flow yield. In many ways Vodafone is similar to a utility but with better growth. It is unlikely that people will give up their cellphone service in even the worst economy as a cellphone has become a necessity rather than a luxury. Utilities currently trade at about 15 times earnings and with a 5% dividend yield. By this measure Vodafone should trade 50% higher, even ignoring the better growth it offers.
As is always is the case when a stock trades cheap analysts will offer a host of reasons why this should be the case. I want to debunk these reasons one by one. A popular way to justify the low multiple is to compare Vodafone to other European telecoms that trade at low multiples. There are a number of differences between Vodafone and other European telecom stocks. Vodafone is a pretty much a pure wireless play while most European telcos have large legacy landline businesses. The second major difference is that Vodafone is a global company that owns 45% of Verizon Wireless in the US and businesses in emerging markets such as Africa and India. Within Europe they have large businesses in Germany and the UK.
Many argue that the European wireless business will not grow due to the economy and regulation. European governments have started to restrict what service providers can charge for roaming and MTR. I view this as a one time modest decline in revenue, after which growth should resume. If all telecoms cannot make their money on roaming and MTR there will be less price competition on service. In a decade from now I expect that most Europeans will have smartphones with data plans regardless of the economy.
Every time I look at Vodafone I am shocked at the fact that I am able to get such a great business for such a low price, which is why Vodafone is my largest position. I'm getting paid a hefty 7.5% dividend while waiting for the stock to appreciate by 50%.