The Vodafone share price is up 71% in a year. What’s going on?

For years, I reckoned that Vodafone (LSE: VOD) was undervalued. Yet things often seemed to go from bad to worse for the share price, albeit there was a juicy dividend yield by way of compensation. Over the past year, though, the Vodafone share price has soared by 71%.

That has brought the dividend yield down to 3.3% — still slightly above the FTSE 100 average.

What has driven this share price turnaround – and could there still be more to come?

A growth story again

Three decades ago, Vodafone was a great British growth story.

It built up a big global operation through ambitious acquisitions. A soaring share price means Vodafone’s market capitalisation is now £27bn. However, that is still a far cry from its peak of over £250bn all the way back in 2000.

As I see it, part of the reason for Vodafone’s surging share price in the past year has been the re-emergence of a growth story after years when the company has been slimming down, selling off some of its Continental European operations.

That growth story has been mobile money in Africa.

This is already big business and could potentially get a lot bigger yet. The stock market has noticed. While Vodafone shares have surged in the past 12 months, they have been left in the dust by the 151% gain during that period for the Airtel Africa share price.

As investors have scrambled to get into the African mobile money opportunity, Vodafone has benefitted. It has an extensive African business footprint and 94m financial services customers across the continent.

Vodafone’s core business remains attractive

I also think the Vodafone share price has benefitted from investors reconsidering its core business.

For years, with the share selling for pennies, it was easy to point to some of the company’s challenges: a debt pile, pricing competition, high capital expenditure needs, and other factors that helped to make the company’s long-term financial prospects seem mixed.

But, then as now, there was also a lot to like. The City seems to be paying more attention to the positive side of the investment case again.

Vodafone is the largest or second-largest player in many markets, it has a strong brand, and the company’s technical expertise runs deep. It generates sizeable operating free cash flows. Those came in at over €5bn in the first half of its current financial year alone.

One to consider

The African mobile money opportunity is attractive and that could mean competition increases. Vodafone’s existing infrastructure and customer base give it an advantage. But that could be weakened over time if rivals do well.

Net debt has been reduced, but at €26bn it remains substantial. That is a risk to profitability as the debt needs to be serviced and ultimately paid off.

Still, even after the Vodafone share price’s outstanding performance over the past year, it remains 4% lower than five years ago.

I see ongoing potential here and reckon investors should consider the share.

The post The Vodafone share price is up 71% in a year. What’s going on? appeared first on The Motley Fool UK.

More reading

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C Ruane has no position in any of the shares mentioned. The Motley Fool UK has recommended Airtel Africa Plc and Vodafone Group Public. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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