Investors stick with Vodafone despite limp growth prospects

Investors have kept their faith in Vodafone even as the company prepares to reveal more subdued sales figures in crisis-struck southern Europe.

Despite growing regulatory pressures, competition and the economic slowdown in Vodafone’s largest market, Europe – factors that are weighing on all telecoms companies in the region – investors propelled shares in Vodafone (VOD.L) to their highest level in a year on Wednesday, at 184p.

Vodafone has had a busy week, first announcing on Thursday that it will buy Australian company Telstra’s struggling New Zealand operations in a £430 million deal. Then on Friday Vodafone announced another deal in its push towards more network-sharing – and pool costs with other telecoms companies – this time in Ireland. It follows a joint venture with Telefonica in the UK. Meanwhile, it is completing the £1 billion acquistion of Cable & Wireless Worldwide (CWP.L) which will increase its share of the fixed line market in the UK.

Investors, starved of income, cannot resist one of the largest dividend pay-outs in the FTSE 100 (alongside Shell). The company’s defensive qualities make it a top holding for many of the biggest investment funds in the UK that are waiting out the tricky markets, such as Stephen Docherty’s  Aberdeen World Equity fund, a Citywire Selection pick. It is also in Citywire Top Stocks, courtesy of its top position in the AXA Framlington UK Select Opportunities fund run by Nigel Thomas.

Next Friday though, the company is expected to post yet more weak sales figures – perhaps even dimmer than flagged up at the company’s full-year results in May. Analysts are primed for revenue growth of just 0.6-07% in the three months to the end of June, compared to 2.3% in the previous three months that ended a year of flat revenue growth.

The group is significantly exposed to peripheral Europe, with Italy in particular expected to drag on sales. This is partly a result of the weak economic backdrop, but also reflects strong competition in the country’s telecoms market.

But Verizon Wireless (VZW), a US mobile operator that Vodafone has a 45% stake in, will once again rescue the British company from market disfavour. Analysts at Liberum, who initiated Vodafone with a ‘buy’ recommendation last week – in line with the majority of other City brokers – describe Verizon as Vodafone’s ‘star asset’, one that will provide Vodafone with the means to pay shareholders another special dividend.

Previewing the coming week’s results, James Britton of Nomura said the US company will account for 59% of Vodafone‘s earnings in its current financial year. ‘Vodafone‘s consolidated assets continue to outperform rivals but its key differentiation remains exposure to VZW’, he said.

Vodafone’s German and UK markets sit somewhere in the middle of this push-pull provided by the company’s underperforming southern European markets and Verizon in the US.

Analysts at Morgan Stanley, describing themselves as ‘medium term optimists’, note that regulation and the performance of Vodafone’s southern European business account for 99% of the decline in the group’s Ebitda since 2009. But that ‘both drags should fade’. When this happens the share could surpass the 200p mark, they say.