Investment Column: Keep resilient Vodafone shares on hold

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The Independent Online


Our view: Hold

Share price: 139.3p (+4.8p)

Vodafone felt the effects of arriving late to the Apple party in the UK. In January, it became the third operator to offer the iPhone, missing out on business first to rival O2 and then Orange. The effect on its balance sheet will not be known until the next quarter, but it is significant that the mobile phone company's chief executive, Vittorio Colao, said yesterday he also wanted to provide 3G services on Apple's iPad.

The real importance of smartphones such as the iPhone, and other mobile devices, is data. Data is the current battleground for operators in developed markets as it has become so much more lucrative than voice calls. Mr Colao unveiled better-than-expected third-quarter results yesterday, saying the service revenues were solid as the public's insatiable appetite pushed data revenues to £1bn for the first time.

Fourth-quarter revenue grew 10.3 per cent over a year earlier to £11.5bn. and the market was pleased that Vodafone raised the outlook for free cash flow in 2010. While there was good news out of the US, and continued strength in India, Europe shows more of a mixed picture. Vodafone seems to have ironed out the worst of the problems in Turkey, revenues grew in Italy and other markets proved resilient, but there were declines in Germany and the UK and its troubled Spanish unit fell 6.8 per cent.

Mr Colao has abandoned the takeover drives of his predecessors and set about slashing costs, saying the group is now "on track to deliver on our strategic priorities in the current financial year". The shares, on 9.2 times forecast earnings for 2011, are not expensive and the dividend yield is excellent (6 per cent). But, as organic revenues remain in decline in large parts of the business, we feel the recent rise in the share price has taken care of much of the short term upside. So hold.


Our view: Buy

Share price: 381.0p (-17p)

Aviva is now the third life insurer to report a marked improvement in fourth-quarter sales that topped analysts' forecasts. However, while we opted just to hold Standard Life, we feel more positive about Aviva.

Total sales for the year actually fell – down to £36bn from £40bn with life and pension sales falling 12 per cent to £32bn. But that was a shade ahead of expectations and masks a turnaround in the fourth quarter with sales up by a fifth against the previous quarter.

The company's new business was up pretty much across the board, too – there does not appear to be the same fear of British companies in Germany that Standard Life experienced in the territories where Aviva operates (most of the rest of Europe). The fund management business posted a slight gain, and the general insurance business attempting a return to profitable growth although the cold snap might hit the figures.

Overall, the picture is positive. Standard trades on 8.5 times full-year forecast earnings and at a modest premium to its in-force business (about 110 per cent). The yield is a healthy 5.8 per cent, even after the recent dividend cut. That makes the shares more expensive than Standard, but Aviva has a much broader spread of business and arguably has better growth potential. It's also a good deal cheaper than Prudential. That being the case, we're buyers.

Fuller, Smith & Turner

Our view: Avoid (for now)

Share price: 539.0p (+2.0p)

Brewer and pub operator Fuller's was yesterday toasting a rise in sales of 2.6 per cent in the 11 weeks to 30 January after "record sales" in December at managed pubs open for more than a year. This at a time when the freeze was keeping many customers at home.

Helped by a slight recovery in consumer spending, the group has delivered this impressive performance by evolving its food offers and growing volumes of its beers, including London Pride and Organic Honey Dew.

But it's not all good news. Fuller's, whose 367 pubs are concentrated in London and southern England, posted a 2 per cent decline at its tenanted inns arm over the 44 weeks to the end of January. Furthermore, the company remains cautious about the UK's economic outlook and prospects. This is a worry for potential investors in Fuller's, whose shares trade on a relatively pricey forward 2010 price-to-earnings ratio of 16. So is a planned refinancing of debt, although Fuller's is "confident" about being able to work a deal over £85m of borrowings which mature in November 2010.

Fuller's unveiled a second interim dividend of 5.35p and reaffirmed its "progressive" payment policy. There are many reasons to like Fuller's, which has a great product and is a well run business. It's just that the shares are pricey. So, regrettably, we say avoid for now. But be prepared to buy on any weakness.