High-yielding Vodafone reassures

Vodafone shares traded back above 200p for the first time in over five weeks on Friday despite a largely disappointing first quarter, as investors decided that this was likely a low point for the mobile operator in what has been a miserable year so far.

The widely-watched service revenue figure fell 4.2% to £9.4 billion at constant currency and once handset sales are stripped out. But that was, at least, in line with consensus estimates, as was a 7.9% decline in the core European market. Germany, Italy and the UK actually did a little better than feared.

Management pointed to evidence of commercial improvement in Germany - revenue there fell 4.9% - while Italy and the UK dropped by 16.1% and 3.2% respectively. Spain, however, remains a concern. There, service revenue slumped by 15.3%, much more than the previous quarter and worse than even analysts had imagined. Vodafone blamed competition and a mix shift to less lucrative SIM-only contracts.

Over in Africa, Middle East and Asia Pacific (AMAP), organic service revenue grew just 4.7% - far less than the 7.6% during the previous three months - after the mobile termination rate (MTR) halved in South Africa where price competition is fierce and widely expected to get worse for the operators.

That said, Vodafone pretty much expected that and has maintained guidance for the year to March 2015. JP Morgan has still tinkered with its forecasts and now expects adjusted earnings per share of 6.4p this year, rising to 7.2p the year after.

So, with the Verizon Wireless deal now firmly behind it, the focus shifts very much onto revenue, and analysts at JP Morgan reckon the top line "should (slowly) begin to benefit from unwinding MTR cuts, easing bundle dilution and the cross sell of fixed-line services." And while the benefits of heavy investment through Project Spring both this year and next will take time to feed through, that prospective dividend yield of 5.7% makes it worth the wait.

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