Time To Cash Out Of Vodafone Group Plc (ADR) (VOD)?

Africa, one of the world’s most promising frontier markets, is probably Vodafone Group Plc (ADR) (NASDAQ:VOD)’s most impressive growth stories. Profits in its African division are set to outpace those of its Southern European division in as little as three years, the company says. In fact, earnings are growing as quickly as 50% in some regions such as Ghana, the Democratic Republic of Congo, Mozambique, Tanzania and South Africa.

Other frontier and emerging markets important to Vodafone Group Plc (ADR) (NASDAQ:VOD)’s growth strategy include the Middle East, India and the emerging Asia Pacific region. As of the quarter ended June 30, the emerging and frontier divisions generated $4.7 billion in revenue. This number grew organically (no accounting tricks!) by 7.5% from last year while the company’s business in developed markets shrank by 7.2% during the same period.

Lean And Mean
Vodafone Group Plc (ADR) (NASDAQ:VOD)’s big haul with the Verizon Communications Inc. (NYSE:VZ) sale will turbocharge an already rock-solid balance sheet. Long-term debt to capital sits at only 28%, impressive for a $158 billion telecom company. Although telecoms are cash-flow monsters, they typically shoulder a lot of debt (which is why they have to be cash-flow monsters). Vodafone has managed to increase its dividend by nearly 50% over the past nine years.

So with a mountain of cash, Vodafone Group Plc (ADR) (NASDAQ:VOD) is ready to ramp up its adventure in sub-Saharan Africa. The cash will come in handy. In a market where there is little to no infrastructure (including electricity in some instances), network build-out is imperative. But in a region where wireless handset penetration is expected to reach 85% by 2015, the investment is worth it.

Risks to consider: While Vodafone’s foray into frontier markets is bold, it’s also fraught with risk. Again, the capital investment will be substantial, and in an area known for governmental corruption where the bulk of the population lives on less than $2 per day, the challenges are numerous. However, although the European business is stagnant, it is predictably so. This will provide the company with dependable, predictable cash flow that will allow it to operate comfortably and provide value to shareholders while it executes its growth strategy.

Action to take –> Vodafone currently trades near $33. The stock has climbed over 30% this year, excluding dividends. While that feels stretched out, based on the dynamics of the stock, there’s still value at this level. The forward price-to-earnings ratio is a moderate 11.4. Based on the Verizon sale windfall contributing to earnings, the company’s strong financial position, and its emerging-market growth strategy, a 12-month price target of $42 sounds about right. Factoring in the 4.7% dividend yield, that would be a total return of nearly 33%.

P.S. — Great-yielding stocks like VOD that have plenty of cash for dividend growth are the foundation for StreetAuthority expert Amy Calistri’s “Daily Paycheck” investing strategy. To see how she’s used this strategy to earn $49,000 in dividend checks since 2010, click here.