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A Leading FTSE 100 Share To Participate In 5G Growth

Published 23/10/2020, 05:59 pm
Updated 02/09/2020, 04:05 pm

Over the past few months, several sectors and themes, such as electric vehicles, alternative energy and "stay-at-home and work-from-home," have been getting increased investor attention.

Since Apple's (NASDAQ:AAPL) recent iPhone event, 5G, the next generation of wireless technology, has entered the limelight.

According to the UK government, 5G

"brings greater speed, capacity and functionality to mobile services, opening up new opportunities for consumers, businesses and public services."

While it is early days for 5G in many countries, analysts concur it will revolutionize our communications. For some consumers, their smartphones may already be benefiting from the rollout of 5G, which means faster connectivity. In addition to a 5G phone, customers need a 5G plan, and be in an area covered by a 5G network.

Investors want to have a better understanding of stocks and exchange-traded funds (ETFs) that will play a role in this disruptive technology. Today, we will discuss UK-based global telecom group Vodafone (LON:VOD) (NASDAQ:VOD).

Vodafone 1-Year Chart.

How Recent Earnings Came

The FTSE 100 index member is one of the companies that manages the mobile communication infrastructure in the UK. The company provides a continuous update on the availability of 5G in the UK and other European locations. It has so far launched 5G services in 57 locations in the UK and close to 200 locations across Europe.

On July 24, Vodafone released Q1 FY21 trading update. Q1 saw a 1.3% decline in organic revenue year-on-year (YoY). Management highlighted the adverse impact of the pandemic.

Investors were pleased to see that for the seventh successive quarter, mobile contract customer loyalty improved. Another point of significance in the report was that in early 2021, Vodafone will spin off its mobile tower business, Vantage Towers (formerly TowerCo).

CEO Nick Read said:

"We have ... seen increased usage in voice and data, alongside record NGN broadband customer net additions in Europe. I am also delighted to introduce Vantage Towers as Europes leading tower infrastructure company."

The IPO is expected to happen in Frankfurt. Vodafone will continue to have a majority stake in the business.

Germany Leads Vodafone's Growth

Potential investors would be interested to know that Germany is now Vodafone's largest market. The focus on Germany follows the 2019 acquisition of Liberty Global's (NASDAQ:LBTYA) European assets, which extended to Germany, the Czech Republic, Hungary and Romania.

It was Vodafone's largest acquisition deal in two decades. In fact, the UK, its home market, currently generates only around 15% of total revenue. The rest of the revenues come from remaining markets that are geographically diversified.

We have to note that the Liberty Global deal has meant a significant pile of debt for Vodafone. In early 2019, Vodafone's dividend yield was more than 9%. However, the high level of debt forced the board to cut its payout by 40% in May 2019.

The current share price supports a dividend yield of more than 7%. On Oct. 22, UK-based shares closed at 108.76p ($14.5 for U.S.-based shares). Since the start of the year, VOD stock is down around 26%. Its forward P/E, P/S, and P/B ratios stand at 17.39, 0.80 and 0.53, respectively.

Given the volatility in broader markets as well as the uncertainty due to Brexit, Vodafone may still come under short-term pressure. A further decline of around 5%-7% would improve the margin of safety for long-term investors. Value investors may want to put the shares on their radar.

Bottom Line

Creating growth opportunities in a mature industry like telecommunication services requires proactive management, which we believe Vodafone has. Management is working to integrate its various mergers and cut costs at the same time. Although there may still be hurdles ahead for the group, the upcoming 5G revolution is likely to provide tailwinds for Vodafone.

Other UK- and continental Europe-based businesses that are likely to play leading roles in the deployment of 5G in Europe include BT Group (LON:BT), the largest telecoms player in the UK, Swedish networking company Ericsson (BS:ERICAs) (NASDAQ:ERIC) and Finland-based Nokia (NYSE:NOK).

Buy-and-hold investors may not see the positive effects of the 5G strategy on company bottom lines immediately. Therefore, some patience on the part of shareholders may be necessary.

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