UK Edition
The economist John Maynard Keynes said that “in the long run we are all dead”. Indeed, no investor can be expected to offer their holdings an infinite amount of time to deliver on their potential. Ultimately, patience must be rewarded with attractive returns.
However, in Questor’s view, a long-term approach is a key tenet of successful investing. Otherwise, an investor will constantly flip-flop between stocks without benefiting from factors such as improving operating conditions, strengthening financial positions and refreshed growth strategies.
Our “buy” tip of Vodafone from January 2021 is an obvious example of a stock that needs more time to deliver on its potential. Since then, it has gained 8pc, but has lagged the FTSE 100 by eight percentage points. However, its third-quarter trading update, which was released last week, showed that its performance was in line with expectations and it is on track to meet guidance for the 2022 financial year.
Encouragingly, the company stands to benefit from the post-pandemic reopening of the global economy. Roaming charges, which are levied when consumers use their mobile phones overseas, have naturally declined while travel restrictions have been in place. Their gradual return could act as a catalyst on profitability. So, too, could a global economy that is forecast to grow at an annualised rate of 4.1pc over the next two years.
In addition, the company’s 5G rollout and wider focus on offering increasingly innovative products have not yet been allowed sufficient time to affect profitability. However, in the coming years, they are likely to offer growth opportunities as consumers trade up to faster, but more costly, data speeds.
Industry consolidation also presents a growth opportunity for the firm as it seeks to improve its financial performance following news that activist investor Cevian Capital has taken a stake in the business. Vodafone’s chief executive stated last week that it is in discussions to merge with various rivals across Europe to create a larger business that benefits from economies of scale.
Clearly, any such deals will naturally be of interest to regulators. However, greater returns among industry participants could lead to higher investment in mobile and fixed-line infrastructure in an era where speed and coverage matter more than ever. This could make industry consolidation more likely from a regulatory perspective.
Separately, Vodafone’s business model could become increasingly attractive as market conditions evolve. Since our original tip, stock market sentiment has generally improved and allowed for greater risk-taking among investors. The company’s defensive characteristics, despite being unable to evade the impact of the pandemic, may hold greater appeal in future than in the recent past should the stock market’s performance begin to revert to its long-term average.
Meanwhile, a dividend yield of 5.6pc could become more attractive if the company is able to deliver on its earnings forecasts over the next few years. Dividends are due to move from being presently uncovered by net profit to enjoying coverage, albeit modest, of 1.1 times. If met, this could highlight to income investors that Vodafone is becoming a more reliable dividend stock.
Of course, the company’s lack of progress in reducing its debt pile since our original tip is disappointing. In fact, net debt has not materially changed over recent months. While the net debt to equity ratio continues to hover around 110pc, the threat of a dividend cut is likely to act as a deterrent to investment among a sizeable proportion of income seekers.
However, in Questor’s view, Vodafone deserves more time to strengthen its financial standing and improve its performance. So far, it has been a disappointment due to its underperformance versus the FTSE 100 since our original tip. But potential industry consolidation, an end to travel restrictions that prompts higher roaming charges and the rollout of 5G amid a buoyant global economic outlook could yet act as catalysts on its share price.
Questor says: hold
Ticker: VOD
Share price at close: 134.2p
Read the latest Questor column on telegraph.co.uk every Sunday, Tuesday, Wednesday, Thursday and Friday from 5am.
Read Questor’s rules of investment before you follow our tips.