UK markets open in 1 hour 20 minutes
  • NIKKEI 225

    26,165.59
    +638.22 (+2.50%)
     
  • HANG SENG

    26,495.21
    +9.01 (+0.03%)
     
  • CRUDE OIL

    43.59
    +0.53 (+1.23%)
     
  • GOLD FUTURES

    1,825.70
    -12.10 (-0.66%)
     
  • DOW

    29,591.27
    +327.79 (+1.12%)
     
  • BTC-GBP

    13,701.73
    -54.78 (-0.40%)
     
  • CMC Crypto 200

    365.32
    +3.89 (+1.08%)
     
  • ^IXIC

    11,880.63
    +25.66 (+0.22%)
     
  • ^FTAS

    3,582.28
    -4.23 (-0.12%)
     

I’d buy Vodafone shares today, but first I’d snap up this dirt-cheap FTSE 100 income growth stock

Harvey Jones
·3-min read
Business accounting concept, Business man using calculator with computer laptop, budget and loan paper in office.
Business accounting concept, Business man using calculator with computer laptop, budget and loan paper in office.

Vodafone Group (LSE: VOD) shares are up almost 4% this morning after it maintained its all-important dividend and reported only a small dip in first-half profits. The telecoms giant has been a FTSE 100 income hero for years and currently yields 6.9%. I’d buy it today.

While Vodafone’s shares look tempting, there’s another FTSE 100 income stock I like even more, because it offers growth potential on top of income. But more of that later.

Vodafone’s shares jumped after it posted a 2.3% drop in first-half revenue to €21.4bn. Thanks to cost cutting, EBITDA profits fell just 1.9% to €7bn. This is a strong performance, given the year we’ve had.

Vodafone shares look tempting

The lockdown has hit companies in all sorts of strange ways. Today, Vodafone reported a slump in roaming revenues, as international travel collapsed, while handset sales also fell. Group CEO Nick Read could still hail “resilient” first-half performance and flag up the group’s “good commercial momentum.” This was driven by increased customer loyalty, a rising fixed broadband base, and significant cost savings.

As well as the dividend, full-year guidance has also been maintained. Next step is to arrange the IPO of Vantage Towers, lined up for early 2021. I’d buy Vodafone today but I wouldn’t expect too much share price growth, as it’s idled for years. For me, this is purely a long-term dividend stock, but a jolly good one.

Vodafone will pay out an estimated £2.23bn this year. This makes it the seventh biggest payer on the FTSE 100, making up 4% of total shareholder payouts. My worry is that it’s only covered 0.7 times by earnings, although City analysts point to some good news on this front.

They predict earnings will rise 18% next year and 43% in 2022, lifting the earnings per share to 8.44p. This is higher than the projected 8.34p dividend per share. This gives me the confidence to buy Vodafone at today’s share price, despite its relatively high valuation of 22.2 times earnings.

I’d buy Rio Tinto’s shares first

And the other FTSE 100 dividend stock I’m even more tempted to buy? Mining giant Rio Tinto (LSE: RIO). The business is on course to pay out an incredible £3.8bn in dividends this year, the fifth most generous income payer on the index, making 6.8% of total payouts.

Right now, the Rio Tinto share price gives you a 6.9% yield. This is more generously covered than Vodafone’s, at 1.5 times earnings. Unlike Vodafone, its shares have rebounded strongly since the March crash, and are up more than 50% since then. It helps that Rio Tinto’s largest client, China, is rebounding strongly from the pandemic.

Investors are feeling more optimistic about shares generally after last week’s Pfizer vaccine news, and the mining giant’s sector is a great way to play a global economic recovery. We may have to wait until 2021 for that, but I’m tempted to take a position in Rio Tinto today. I reckon it offers me an attractive entry point, trading at just 9.1 times earnings.

If I could buy just one of these two stocks today, it would be Rio Tinto.

The post I’d buy Vodafone shares today, but first I’d snap up this dirt-cheap FTSE 100 income growth stock appeared first on The Motley Fool UK.

More reading

Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.

Motley Fool UK 2020