Is Now The Right Time To Buy Vodafone Group plc?

Vodafone Group plc (LON:VOD) offers a tempting 5.6% yield. but what are the risks?

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VodafoneVodafone Group (LSE: VOD) (NASDAQ: VOD.US) remains the subject of takeover speculation, but it would be unwise to buy the firm on this basis alone — so do the telecom giant’s shares look attractive at today’s price?

I’ve taken a closer look at Vodafone’s performance and valuation to find out more.

Valuation

Let’s start with the basics: how is Vodafone valued against its past performance, and the market’s expectations of future performance?

P/E ratio

Current value

P/E using 5-year average adjusted earnings per share

5.9

2-year average forecast P/E

30.5

Source: Company reports, consensus forecasts

Vodafone’s dramatic shrinkage over the last year is clear from these figures — the sale of the Verizon Wireless business has removed a large chunk of Vodafone’s earnings.

The firm has a substantial hill to climb to prove that it can reinvest the Verizon proceeds successfully and generate new growth, but in the meantime Vodafone has promised to maintain its dividend, which currently offers a prospective yield of 5.6%.

Do the numbers stack up?

At this point, I’d normally look at a company’s historic growth, but in Vodafone’s case, I feel that so much has changed over the last year — with the sale of Verizon Wireless and two sizeable acquisitions in Europe — that a historic comparison is of limited value.

Instead, I’m going to take a closer look at the latest company and market forecasts for Vodafone, which should give us some idea of what to expect over the remainder of this year:

2014/15 forecast

Value

Revenue

£42,341m

Earnings Before Interest, Tax, Depreciation and Amortisation (EBITDA)

£11.4bn – £11.9bn

Post-tax profit

£1.74bn

Dividend

11.3p

Source: Consensus forecasts/Vodafone guidance

Vodafone’s dividend is uncovered by earnings, but the firm can afford to support this for a limited time, so I don’t see this as an immediate concern.

Of more concern is how quickly Vodafone’s profit margins and profits will rise. The company’s forecast for EBITDA of £11.4-£11.9bn suggests, based on previous years, that adjusted operating profit will be in the region of £5bn, giving an operating margin of about 12%.

I’m happy with that, but the second element will be to see how fast new earnings feed through from Vodafone’s Project Spring network upgrade programme, plus this year’s two big acquisitions, German cable operator Kabel Deutschland and Spain’s Ono.

For more information on these elements, we’ll have to wait for the firm’s half-year results in November — or more likely, next year’s final results in May.

Buy Vodafone?

As a Vodafone shareholder, my plan is to hold my position and enjoy the dividend income. However, I don’t plan to buy any more Vodafone shares until I see some signs that the company’s growth strategy will come good.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Roland Head owns shares in Vodafone Grouop. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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