Investment update: Vodafone results y/e 31 March 2012

Vodafone @ 171.35p, -1.25p (-0.7%)

Vodafone managed a healthy bounce last week against general market sentiment which reflects a warm reception of the final results.

In its own words the company delivered "a robust financial performance in a difficult environment".

The numbers came in as follows:

-     Group revenue up 1.2% to £46.4 billion; full year organic service revenue growth +1.5%*; Q4 +2.3%*

-     EBITDA down 1.3% at £14.5 billion; EBITDA margin 31.2%, down 0.8 percentage points (0.6 percentage points before restructuring costs)

-     Verizon Wireless service revenue up 7.3%*; our share of profits up 9.3%* to £4.9 billion

      • £2.9bn dividend from Verizon Wireless

-     Adjusted operating profit at £11.5 billion, up 2.5%* on an organic basis

-     Gain on disposal of investments of £3.5 billion (Note 1) and impairment charges of £4.0 billion

-     Free cash flow £6.1 billion (-13.4%) after capex of £6.4 billion

-     Final dividend per share of 6.47 pence, giving total dividends per share for the year of 13.52 pence (including 4.0 pence special dividend), up +51.9% 

-     £3.6bn of share buyback, £6.8bn programme now 91 % complete

As you would expect there is an underperformance in Europe but this is currently being offset by growth in emerging markets. 

The headline numbers are arguably flat (within a range) as they have been for a number of years. But, the continuing strength of the company throughout its strategic re-position on minority/non-core interests has been its strong cashflow (used to manage the debts from its acquisitive years) and a steadily increasing cash position which now stands at £7.138 bn (2011: £6.252 bn).

So cash balances increasing, even with the current commitment to the share buyback which cost £3.6bn last year, and a dividend which cost £6.654bn in 2012.  

Net debt (debt less cash), at £32.029 bn, is going in the right direction and represents a gearing of 36.58% which is an improvement on the 2011 comparables of £35.372 bn and 39.14%.

The final dividend of 6.47p per share (2011: 6.05p) has been declared after the results and will show as a £3.195 bn outflow of cash in 2013's accounts. 

The total dividend outlay in 2012 amounted to £6.654 bn consisting of the 2011 Final, 2012 Interim, and 2012 Special. 

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This does show the merits of the company's strong useable cashflow but also the contribution that an ongoing Verizon dividend can make to the company's shareholders. 

All makes the ship look quite steady in difficult times and I have to say that the investor information is particularly impressive (Vodafone Group Plc Preliminary results). 

It is very visual with waterfall charts to illustrate step changes in performance and, using recent historic performance (2008-2012) as a base, also throws a lot of the company's strategy into the mix as a look into a possible future for the company (2015).

  

It looks to me that the company's non-controlling 45% interest in Verizon wireless continues to look like the largest contributor to future growth if the joint venture can continue to pay dividends to its parent companies. The recent resumption of a payment of $10bn dividend payment realised $4.5bn (£2.9bn) to Vodafone: £2bn of which was further distributed to Vodafone shareholders as a special dividend with the remaining £0.9bn used to pay down debt.

 

However, it should be noted that the relationship between Vodafone and its partner in Verizon Wireless, Verizon Communications, is probably still not perfectly in accord so the politically correct statement has always been that last years dividend was a "special" but it does give a taste of what is likely to happen now that Verizon Wireless has made significant inroads into its own debt position following a $28.1bn acquisition in 2009.

For many years Vodafone's lack of control over such a significant investment with no return was seen as a huge burden on the company's capital but it is starting to look like management's faith (or stubborness) might yet yield a significant reward for shareholders.

With more than 108 million users, Verizon Wireless is the largest mobile operator in the US so is benefitting significantly from the growth in smartphones.

Vodafone doesn't initially include Verizon's performance figures in its group numbers (instead showing the dividend from associates), but there is a chart in the presentation that illustrates the effect on group service revenue growth, and free cashflow, if Vodafone had the controlling stake in Verizon.

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Click to enlarge, close to return

 So with 2013 guidance looking to be similar to 2012:

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any significant upside is likely to be constrained unless Verizon declare a dividend this year.

Its all about smartphones, emerging markets, and Verizon on the upside then but what about the downside.

Well, European woes continue to circle in the background as does an ongoing threat from the Indian Government to apply a retrospective tax bill on the company, and might yet rewrite legislation to do so.

Financial strength will also be required as 4G starts to take hold but hopefully this will not have the same paralysing effect on growth that the crazy auction for 3G licenses did last time around. After all its taken 10 years for phones to actually live up to the vision of 3G.

Back onto the upside and there is a potentially warm reception should the company's cash offer for Cable & Wireless Worldwide go through giving it a platform to establish itself in corporate business and bring a fixed line network to ease wireless capacity (and dependency on BT).

On a further note of caution, I see that Vodafone's Chief Financial Officer, Andy Halford has sold almost half his stake with 976,056 shares at 171.624p and 23,944 at 170.46p for a total of just over £1.7m. 

It would be nice to know his reasons particularly when he is in arguably the most significant position regarding the financial health of the company.

Since purchasing them for my portfolio in August of last year, my investment in Vodafone is showing a capital gain of 6.34% plus a further 4.37% in dividends, 10.71% in total.

The shares are also due to go ex-dividend on the 6 June 2012, following which shareholders will be eligible for the declared final dividend of 6.47p per share, payable on the 1 August 2012. 

6.47p represents a return of 3.7% of the current share price of 171.35p.

Still on an undemanding forecast PE of 10.6 and a potential yield of 7.5% (incl. Verizon), the shares are looking like a steady investment. A slow grower perhaps but one that should continue to generate good solid returns going forward with a possible ace up the sleeve in Verizon Wireless. 

The shares are also an initial pick in my experimental strategy "Following Woodford" (Following Woodford! ).

All in all, one to tuck away and forget about I think.

Article links:

- http://www.vodafone.com: news release

- http://www.vodafone.com: Vodafone Group Plc Preliminary results

Related posts:
- Following Woodford! 
- March 2012: Portfolio Update.
- New proposed investment strategy based upon Neil Woodford's top 10.
- Vodaphone update: Interim results.
- Portfolio housekeeping and additions: Talk Talk, Invesco Perpetual, Vodaphone, and Tesco.