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Vodafone reinvention gathers pace

Vodafone's reinvention is gathering pace. Forecast-beating results on November 11 lifted shares in Europe's largest telecoms operator by five per cent. Rocketing data demand is an early endorsement of Vodafone's £19-billion ($30 billion) splurge on networks. A return to top-line growth looks within sight at last.

The key number for the group is organic service revenue, a like-for-like measure that excludes things like handset sales. This has fallen for nine straight quarters, but the decline has now moderated to a surprisingly slim 1.5 per cent year-on-year. At its nadir a year ago, these sales were shrinking nearly five per cent. The picture is muddied by seasonal swings, and earlier price cuts to satisfy regulators. Still, house broker JPMorgan Cazenove now reckons growth on this basis could turn positive within three quarters. That's vital for market sentiment.

Almost as important are the signs that consumers are hungry to access videos and other data carried over third- and fourth-generation mobile broadband. Vodafone says second-quarter data traffic soared 80 per cent, and 4G has helped the group upsell clients onto pricier subscriptions.

That supports Chief Executive Vittorio Colao's push to transform the telco, worth $87 billion even after exiting its US joint venture earlier this year. In an era of data-hungry smartphones and rivals offering mobile, landline, broadband and TV together, you don't want to be a mobile-only group with so-so networks. Hence pricey cable takeovers in Germany and Spain, and the "Project Spring" investment programme.

That means jam tomorrow for investors: free cashflow shrunk to basically nothing in the first half, from £1.9 billion a year earlier. Nor, with AT&T busy elsewhere, can shareholders count on a takeover at a premium. Meanwhile, already fierce competition may intensify in key markets like Britain, where Vodafone and BT will soon be going head-to-head in both mobile and broadband. To keep shareholders onside, Colao has resorted to generous dividends - as of November 10 the shares traded on a forward yield of 5.5 per cent.

The stock has generally struggled since Vodafone handed shareholders $24 billion in cash and a huge slug of Verizon shares, though they have recently regained their footing. At 6.2 times 2015 Ebitda, on JPMorgan's estimates, they are not screamingly cheap versus Europe's national incumbents on an average 6.3 times. Now the momentum is with the business, and probably with the stock.