I recently added Vodacom to our telecommunications portfolio because of the company’s good return on invested capital, low cost of capital, and strong dividend yield.
I am part of a team that manages a small share portfolio with mostly JSE-listed equities and a handful of ETFs for international exposure.
The portfolio already has exposure to MTN, and we had to assess whether it was worth it to also own Vodacom or Telkom.
All the telecommunications players are struggling to show strong growth, despite investing in geographic expansions and growing their financial and fibre portfolios.
In our view, MTN has the best price growth potential. However, Vodacom is also attractive because of its dividend and good capital allocation.
As technological advances and network expansion largely determine their future performance, capital expenditure is an important consideration for telecom companies.
Effective capital allocation is, therefore, essential for operators. The return an operator generates on its invested capital (ROIC) is a good way to assess capital allocation efficiency.
Comparing ROIC with the weighted average cost of capital (WACC) gives a good understanding of the return an operator generates from its capital compared to its cost to obtain that capital.
Vodacom generated a higher return on its invested capital than MTN and Telkom over the last decade.
In 2022, Vodacom generated a 13.02% return on capital compared to MTN’s 9.06% and Telkom’s 6.52%.
If an operator can access cheap capital, it will positively affect its net return on capital.
Analysing these companies’ costs of capital (WACC) is an important consideration in determining the sustainability and magnitude of their profits.
Since 2021, Vodacom has been able to obtain capital at a lower cost than MTN and Telkom.
With the high ROIC and low WACC, it is not surprising that Vodacom’s net profit margin of 16.71% is higher than MTN’s 7.57% and Telkom’s 6.15%.
Vodacom’s CEO Shameel Joosub is another reason I feel safe putting my money into Vodacom. He has been with Vodacom since 1994 and has grown with the company.
Joosub worked under Vodacom’s successful founder Alan Knott-Craig and held many executive positions before taking the reigns.
He is the most experienced telecommunications chief executive in South Africa, and his knowledge in the industry is hard to duplicate.
The most attractive part of Vodacom is its steady dividend yield. You are basically guaranteed a good dividend each year.
Vodacom rapidly increased its dividend payments from 2010 to 2013 and kept them relatively stable.
Although there has not been much growth in the dividend payments since 2013, a dividend yield of 7% is very attractive.
Vodacom has a high payout ratio of 84% of its earnings, and there was never a period where its net income couldn’t cover the dividend payment.
Vodacom is a good option to consider for investors looking for a stable company with a good dividend.