Boring Is Beautiful Again

01/07/2009 11:00 am EST


John Christy

Founding Editor, Forbes International Investment Report

John Christy, editor of Forbes International Investment Report, tells of a former technology high flyer which now resembles a utility stock in its steady results.

During the infamous bubble of the late 1990s, UK-based mobile phone service provider Vodafone (NYSE: VOD) was a poster child for speculative excess in the telecom, media, and technology sector.

At its peak, Vodafone’s market capitalization topped $400 billion, making it the most valuable company in Europe. Its $180-billion hostile bid for Germany’s Mannesmann in 2000 shattered all mergers & acquisition (M&A) records at the time and ushered in a new era of cross-border deal-making.

For Vodafone shareholders, it has been a turbulent ride. The company’s US-listed ADRs surged nearly tenfold in the latter half of the 1990s to a peak of $63 in March 2000. Shares recently changed hands at $18, a 70% plunge from those heady days earlier in the decade. The unlucky folks who bought into the Vodafone story at the peak of bubble era hype remain under water to this day.

The global boom in mobile telephony, however, has been anything but hype. Ten years ago, there were only 318 million mobile phone users worldwide—less than 10% of the world’s population—according the International Telecommunication Union (ITU). This month that figure topped the four billion mark, meaning more than 60% of the people on the planet have cell phones.

With 260 million subscribers in 25 countries, Vodafone is now the world’s largest mobile telecom service provider by market cap, and second only to its joint-venture partner China Mobile (NYSE: CHL) when ranked by the number of subscribers.

Like many other survivors of the bubble, Vodafone now offers investors a much more favorable value proposition. At a recent $22, Vodafone is selling for just 8.5x next year’s consensus earnings and [a bit above] book value. It also sports a 3.8% dividend yield.

Two important long-term themes dominate Vodafone’s business: emerging markets and broadband. Emerging markets account for 26% of Vodafone’s revenue. One especially strong market is India, where it has 55 million customers—a 17% market share. Although growth in India is slowing, Vodafone added two million new customers (net) in the month of October alone.

In November the company unveiled a cost-cutting plan targeting annual savings of $1.5 billion by fiscal 2011 and a goal of sustainable, long-term annual free cash flow in a range of $7.5 billion to $9 billion. Since May 2006, Vodafone has returned $30 billion of cash to shareholders in the form of dividends and stock buybacks.

That makes Vodafone look more like a classic utility stock than the sexy growth story it once was. British investors call this “ex-growth”, a fancy way of saying “boring”. But in 2009, boring might look fashionable again.

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