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while the FTSE 100 As a whole it fared better than most indices in the 2022 stock market correction, many of its components were not so lucky. And some companies, even those believed to be stalwarts, have suffered double-digit declines, sending dividend yields soaring.
This seems to perfectly describe the current state of vodafone (LSE:VOD) right now. The telecom giant has seen its share price drop by almost 30% in the last 12 months. And as a result, its performance now stands at an impressive 8.7%!
As long as this decline in valuation isn’t caused by something compromising their cash flows, investors could be looking for an incredible income opportunity. So is this stock worth adding to a Stocks and Shares ISA before the April 5 deadline? Let’s take a closer look.
Investigating Vodafone’s dividend yield
Before you jump into a seemingly cheap income investment, it’s essential to verify that it’s actually a bargain rather than a falling knife.
Despite what the drop in valuation suggests, Vodafone’s UK operations are doing very well. Between April and September 2022, the company added an additional 76,000 contract customers, increasing its mobile revenue by 10.5%. The trend has continued into the third quarter, with churn rates relatively stable at 12.7%.
Meanwhile, its African mobile payment network, M-Pesa, continues to gain market share. Payment volumes are up a further 14%, bringing their total contribution to Vodafone’s services revenue channel revenue to 25.7%. And this double-digit level of performance appears to have spread to other international markets such as Turkey, Egypt and Ghana.
Needless to say, this is all quite positive. And on the surface it suggests Vodafone’s cash flows are set to support its 8.7% return. So why has the stock price plunged due to seemingly strong results?
a beer problem
Despite great success in many of its target markets, trouble seems to be brewing in Germany. Following a recent change in regulation, it has been easier for consumers to opt out of their broadband contracts, resulting in an exodus of 83,000 customers.
This is particularly problematic as Germany is Vodafone’s highest margin market. Combine this with rising costs courtesy of inflation and profit margins have started to shrink. All of this culminated in a free cash outflow of €3.2bn and a downgrade in the group’s short-term outlook.
CEO Rick Read has now stepped down after four years on the job. And a replacement CEO has yet to be appointed, with CFO Margherita Della Valle acting as the group’s interim leader.
The future of Vodafone’s dividend yield remains unclear. A new cost savings initiative has been launched to try to reduce annual expenses by €1 billion. Meanwhile, a new joint venture with Altice in Germany is trying to bring broadband to more than seven million homes.
If these new strategies are successful, the group may be able to maintain its current 8.7% payout to shareholders. But its track record is rather sketchy, with the share price on a steady downward trend since 2017. So personally, I’m in no rush to add Vodafone shares to my income portfolio today.
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