Why I’d buy cheap Vodafone shares to boost passive income

·3-min read
Abstract 3d arrows with rocket
Image source: Getty Images

Vodafone (LSE:VOD) shares have had a tumultuous year so far. They flew out of the blocks at the start of 2023, rising 19% by mid-February.

However, between then and the beginning of April, the group’s share price plummeted from 102p back down to 87p. That’s not far off from where they started the year at 85p.

Since then, though, Vodafone shares have climbed steadily back up to 96p. Even at this price, I think they could still represent good value. Here’s why.

An attractive yield

Besides a relatively low price-to-earnings ratio of 9.8, Vodafone’s beefy dividend yield immediately grabs the attention of investors like me who are looking to boost passive income.

Currently standing at 7.9%, the telecommunications giant’s yield is among the highest in the FTSE 100 index.

However, it’s worth noting that the prospective yield is high primarily due to a drop in share price more than anything else.

Moreover, I’m slightly concerned the dividend at current levels may not be covered by cash flows, meaning the cash return might have to be smaller in the short run.

A steady financial performance

Vodafone’s most recent trading update was nothing to write home about.

Group service revenue growth was 1.8% (compared with 2.5% in the previous quarter), with the slowdown fuelled by lower roaming growth in Europe.

Germany, Italy, and Spain were the main detractors, offset somewhat by growth in the UK and other European markets.

However, it was the company’s resilient performance in Africa that impressed me, with growth driven by data and financial services.

Despite the company being on target with respect to financial guidance for the year, Vodafone’s CEO highlighted the recent decline in revenue in Europe as evidence that the group can do better.

Not so plain sailing

But improving won’t be straightforward.

Ongoing risk factors and uncertainties that could impact performance include supply chain disruption amid unfavourable macroeconomic conditions.

Adverse changes to economic conditions in the second half of 2023 could also result in higher interest rates and reduced consumer spending.

Together, these factors would spell trouble for Vodafone.

An optimistic future outlook

That said, with a strategy focused on sustainable growth to drive returns, I’m fairly optimistic when it comes to Vodafone’s long-term outlook.

For example, outside Europe, the group’s Vodacom subsidiary has some exciting growth opportunities in Africa. This includes M-Pesa, which is Africa’s most successful mobile money service and the region’s largest fintech platform.

More broadly, I think Africa looks set to become an increasingly important market for Vodafone as the region develops.

I’m confident the group’s leading position in telecoms markets around the world means it’s well positioned to benefit here too.

As a result, I think Vodafone shares offer significant value at their current price. If I had some spare cash lying around, I’d happily buy Vodafone shares as part of my strategy to build long-term passive income.

The post Why I’d buy cheap Vodafone shares to boost passive income appeared first on The Motley Fool UK.

More reading

Matthew Dumigan has no position in any of the shares mentioned. The Motley Fool UK has recommended 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.

Motley Fool UK 2023