Interactive Investor

Vodafone shares: 8% dividend yield and potential to double

7th October 2020 12:55

Graeme Evans from interactive investor

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This expert believes a post-Brexit trade deal could boost the sector and share prices.

The working from home trends driving tech stocks Apple (NASDAQ:AAPL) and Amazon (NASDAQ:AMZN) have so far done little for shares in the telecoms sector after a woeful year for the likes of Vodafone and BT Group.

The gulf in tech/telco performance was highlighted today by Deutsche Bank in a note focusing on Vodafone, whose share price it thinks is out of kilter with fundamentals. As such, it should be trading at 230p rather than near to a post-Covid low of around 110p currently.

Deutsche said telco business models are substantially resilient to Covid-19 and should benefit from the working from home phenomenon, given increased internet usage and data traffic.

The lack of international travel is one negative factor due to the impact on roaming revenues, with Vodafone's exposure to emerging market currencies another drag in the pandemic.

The shares had rallied 40% to 141p by mid-June — helped by the payment of a 4.5 cents final dividend in annual results — but have fallen back again in recent weeks. They are now trading at just 12p or 12% above their March low, despite Q1 figures in July highlighting service revenues in line with expectations.

It's been a similar share price story at BT Group (LSE:BT.A), although its lowly £10 billion valuation more reflects the uncertainty caused by the cost of funding the rapid roll-out of full-fibre broadband.

Deutsche thinks market forces may be at play in the sector's underperformance, given that local indices account for about 75% of the variation in European telco stock price moves. Following on from this logic, a post-Brexit trade deal could work in favour of the sector.

The bank added: “In the absence of a deal, telcos should be less impacted due to their predominantly domestic nature and outperform the UK market at least.”

One big reason for Deutsche favouring Vodafone is the company's ability to continue paying a healthy dividend with an 8% yield. The bank also highlighted the value of Voda's infrastructure assets and the prospect that the company will resume growth next year.

It is also looking forward to next year's Frankfurt IPO of Vantage Towers, the company's phone masts business boasting 68,000 towers and leading positions in almost all of its nine markets.

A capital markets day due on 17 November will focus on the Vantage sale and should at least help shine a light on the broader value of the company's assets. Deutsche also expects half-year results due the day before to provide investors with some encouragement on Vodafone's trading outlook and dividend policy.

The company has a loyal following among retail investors, based on factors such as its sheer size, cash generative ability and chunky dividend yield, which is particularly attractive when many companies have recently chosen not to pay out at all. 

Deutsche added:

“Chief risks to our ‘buy’ rating stem from increased competition, forex volatility, execution on integrating recently acquired assets and longer-term economic malaise due to the virus.”

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

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