Ring in returns with Vodafone

The latest figures from Vodafone, which has over 454m mobile customers and operates in more than 20 countries, already point to a revival in its fortunes. It posted a 2 per cent rise in organic cash profit to £5.8bn in the six months to 30 September after three successive years of first-half declines. Moreover, in Europe, which represented two-thirds of first-half group service revenue, sales declines have narrowed for five consecutive quarters and organic service revenue rose in seven of the 13 European nations where the group operates. Its gains reflected buoyant demand for high-speed mobile and broadband services, which Vodafone has tapped into by expanding and improving its network. Outside Europe, trading has been especially strong in India, Turkey and other emerging markets. Organic first-half cash profit climbed 9 per cent in Africa, the Middle East and Asia Pacific.

Targeted investments have laid the groundwork for growth. Vodafone's two-year investment programme, Project Spring, has centred on broadening its high-speed 4G wireless coverage, modernising and expanding its mobile and fibre networks, rolling out enterprise services internationally and improving its stores. Indeed, the group now offers 4G to four-fifths of the population of its European territories. That has helped it to amass nearly 30m customers for the service. Moreover, offering high-speed broadband to 66m homes in Europe has helped it to attract 12.5m broadband customers. Mobile growth also remains strong and the group drew 2.7m mobile contract users in the first half. And its fledgling businesses, such as machine-to-machine technology and mobile payments service M-Pesa, continue to perform well.

Vodafone has also spurred growth through acquisitions and product launches. For example, its purchases of Kabel Deutschland and Ono enabled it to introduce a combined landline, mobile and TV service in Germany and a cable, mobile and TV bundle in Spain. Moreover, it recently launched consumer broadband in the UK and plans to roll out domestic TV services in early 2016. Those developments highlight the group's strategy of bundling mobile, TV, fixed-line and broadband services, which boosts average revenue per user and discourages users from switching suppliers.

There's also the possibility of renewed takeover speculation. Rumours of a tie-up with Liberty Global swirled this year after the cable giant's chairman, John Malone, described Vodafone as a "great fit". Analysts highlighted the strategic value of combining Liberty's Virgin Media business with Vodafone in the UK to fend off mounting domestic competition, or merging the pair's fixed-line operations in Germany. Although talks of a potential asset exchange concluded in October, we think a deal remains a distinct possibility.

While Vodafone's hefty investments and acquisitions are helping underpin growth forecasts, the impact these actions are having on cash flow and debt are also a source of anxiety for income hunters. That's understandable as Jefferies is forecasting free cash flow of just £276m this year compared with the £3bn needed to cover forecast dividend payments. Nerves have also suffered due to Vodafone's decision to withdraw a planned long-term bond issue last month due to the conditions being demanded by lenders. Jefferies reckons free cash flow will need to rebound towards £4bn to reassure the market over dividend growth prospects. As investments tail off, the broker forecasts free cash flow to rise to £1.9bn in the year to 31 March 2017, followed by £3.5bn in 2018 and £3.9bn in 2019 before finally breaking the £4bn mark in 2020.