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Vodafone (VOD) – Buy This Undervalued Dividend Stock

Vodafone Group Plc (ADR) (NASDAQ:VOD) completed the sale of its 45% stake in Verizon Wireless to Verizon Communications Inc. (NYSE:VZ) a little more than a year ago now, and VOD stock has been in a slow slide ever since.

Vodafone stock VODI get it: The mixed financial results VOD posted from euro headwinds caused trepidation. But extreme caution often leads investors to overlook intrinsic value, which I believe hasn’t been priced into Vodafone stock.

European markets in general are enjoying a strong 2015, with the Vanguard FTSE Europe ETF (NYSEARCA:VGK) up some 6% year-to-date vs. nearly flat returns for the S&P 500.

European markets are being powered by Europe’s central banks, which are committed to keeping stimulus plans going.

And Vodafone? Well, this European telecom has the financial strength to weather life without Verizon Wireless, and Vodafone stock is a good value play among telecom stocks right now.

Here’s how VOD plans to stay ahead of the game.

VOD Is Recovering in Europe

While analysts expect economic and regulatory pressures in Europe to push Vodafone revenue down in 2016, there are a number of longer-term drivers to factor in, such as increased presence in all markets thanks to planned network improvements, improved customer satisfaction and highly expanded 4G coverage.

Over the next two years, VOD expects to invest $28 billion on its Project Spring initiative, which aims to grow the markets comprising the heart of VOD’s revenue — the U.K., Spain, Germany, India and South Africa.

To this end, Vodafone is dumping money into capex, planning wider coverage areas for mobile coupled with higher speeds and network capacity through its Project Spring initiative with hopes of differentiating Vodafone’s network and service from competitors to its 400 million mobile customers.

Vodafone CEO Vittorio Colao expects 4G to play a big role in growing earnings:

“Today in Europe, only 6% of our customers are using 4G. In the next 18 months, we will reach 90% 4G coverage in Europe, giving us a great opportunity to increase penetration, stimulate data usage and grow customer spend.”

VOD Expanding Its Horizons

VOD is also setting sights on the burgeoning Internet TV market, opening new UK offices and filling them with poached staff familiar with broadband and OTT internet TV. Vodafone’s 2012 acquisition of Cable and Wireless Communications Plc will help facilitate the release of a Vodafone branded set-top box by November 2016 as VOD seeks to push its U.K. revenues higher.

VOD recently bought Spanish operator Ono for roughly $10 billion as well as German cable company Kabel Deutschland for another $10 billion. And Kabel has grown revenue 6.5% year-over-year for a nice boost to Vodafone’s German revenue.

Vodafone also is spending its Verizon Wireless windfall to expand its presence in emerging markets, such as its move to buy out minority shareholders and take control over its Indian subsidiary. Vodafone estimates a 95% population coverage in India’s urban areas by March 2016 and has already seen its service revenue in India increase 13% from its growing customer base and data reliance.

And in VOD’s South African market, its data revenue and M-Pesa service from Vodacom contributed to an 0.3% increase in organic service revenue according to VOD’s annual report. M-Pesa, a mobile payment service launched in 2007, has more than 4.4 million customers and continues to grow in South Africa and all of Vodafone’s markets.

Vodafone Stock Remains a Great Dividend Play

Vodafone has been using share buybacks to give value back to stock holders for some time. It bought back more than 2 billion shares in fiscal 2012, then another 700 million in FY2013.

Moreover, while new money won’t be privy to the special dividend already paid out from the Verizon Wireless cash haul, VOD still yields a healthy 5.5% annually on its twice-yearly payout

Don’t be scared away from a good value just because Vodafone has had an uninspiring start to the year. After VOD finishes building out its Project Spring initiative, capex will decrease, and with it so will pressure on Vodafone’s dividend.

Vodafone is a large, established business, and even in its current capex intensive state, it still boasts positive free cash flow. What’s more, VOD has almost $20 billion in cash and short-term investments, so it can afford to increase its dividend payments even while making more acquisitions to better position itself for global growth.

As of this writing, John Kilhefner did not hold a position in any of the aforementioned securities. 

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