Vodafone's Q3 results fuel further share price rally

A jam tomorrow stock for so long, Vodafone is beginning to deliver, and the share price has shot up this year to levels not seen since last summer. Our head of markets walks you through the highlights of its third-quarter results.

Vodafone Group (LSE:VOD) has continued its grind towards higher growth and used this third-quarter update to reiterate its improved earnings prospects for the year, with free cash flow to come of at least €5.3 billion (£4.4 billion).

There are some factors at play which could further revitalise this growth, such as recovering handset sales and roaming fees which are slowly starting to return in line with the increase in international travel. At the same time, the Liberty Global assets acquisition in Germany is showing some signs of early success, with incremental growth adding to the significant cost synergies, which the company expects to achieve within five years of the completion of the deal.

Group service revenue growth of 2.7% was a marginal improvement on the previous quarter and was underpinned by robust performances in most of Europe and in Africa. In Europe, which accounts for 52% of revenue, apart from Germany the UK performed well, bolstered in particular by good iPhone demand and a successful Black Friday campaign. Vodafone is also looking to strengthen the commercial momentum following the Liberty deal, and the current direction of travel is supportive of that aim.

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In Africa, where the company now has 187 million mobile customers in eight African markets, the progress continues strongly. The relatively new M-Pesa payment system processed 5.3 billion transactions in the quarter, while general data users also spiked.

However, for all the progress Vodafone has become a company which has yet to fulfil the potential provided by its scale, cash generation, experience and global sprawl. The extraordinary expense of 5G participation will continue to eat into cash, its net debt pile is now in excess of €44 billion following the acquisition and the ferocity of competition within the sector, often based on little more than price, is an unavoidable cost of doing business.

The famously generous dividend yield, which currently stands at 5.9%, has provided some solace to investors who are effectively being paid to wait, but equally there are signs that it may have become a trading stock, as opposed to a longer term core investment.

Recent reports of stakebuilding by an activist investor and a potential partner tie-up within its troubled Italian market have refocused interest in the shares, which have seen a rise of 11% since the beginning of the year. However, this bounce does not repair the longer term underperformance.

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Over the last year Vodafone shares have risen by just 1% as compared to a hike of almost 16% for the wider FTSE100. Further back the performance worsens, with the shares down by 15% over the last two years and by 34% over the last five years.

Despite the possibility of Vodafone becoming the perennial underperformer and “jam tomorrow” stock, its supporters remain resolute on prospects, and the market consensus of the shares as a "strong buy" remains defiantly in place.