Vodafone Group PLC (LON:VOD) shares gained as Barclays Capital upgraded the stock, saying the dividend is well covered despite concerns about its sustainability.
Barclays said the telecoms company is its “top pick” of the sector as it raised its rating on the stock to ‘overweight’ from ‘underweight’ and lifted its target price to 280p from 230p.
READ: Vodafone shares jump as it lifts full year guidance after first half profits grow
“Vodafone offers a 2018 March 6% dividend yield, and yet many question its sustainability, not just its potential to grow,” the bank noted.
“People also question how Vodafone will be able to monetise data, and the extent to which convergence presents competitive/strategic risk; whether regulatory headwinds will ever end; when cost cutting will be net vs gross; when capital expenditure will stop increasing; and whether Vodafone will merge with Liberty Global.”
But Barclays sees this as a “rear view mirror” way of looking at Vodafone with such arguments “far less relevant” thanks to an underlying earnings (EBITDA) compound annual growth rate of 4-5% in the next three years and positive revenue momentum.
The bank said Vodafone’s dividend has not been covered by free cash flow over the past years but this has changed as organic service revenue and EBITDA are now “firmly positive, giving operating leverage benefits along with cost opportunities from digitalisation”.
“We believe the dividend is now well covered, even post spectrum,” it said.
READ: Vodafone enters into strategic alliance with Japan's Softbank
Barclays lifted its forecasts for EBIDTA in fiscal years 2019 and 2020, by 1.6% and 3% respectively due to greater cost discipline. It expects 1.7% organic service revenue growth in 2019 compared to 1.1% previously.
“Vodafone has demonstrated its ability to grow fixed line revenues and market share in all its key markets in recent periods through a combination of self-build and wholesale agreements.”
Shares edged up 0.75% to 229.55p in morning trading.