This P/E Suggests Vodafone Group plc is a Buy

Vodafone Group plc (LON:VOD) remains a buy, but there are risks, says Roland Head.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

The FTSE 100 has risen by more than 85% since it hit rock bottom in 2009, and bargains are getting harder to find.

I’m on the hunt for companies that still look cheap, based on their long-term earnings potential. To help me hunt down these bargains, I’m using a special version of the price to earnings ratio called the PE10, which is one of my favourite tools for value investing.

The PE10 compares the current share price with average earnings per share for the last ten years. This lets you see whether a company looks cheap compared to its long-term earnings.

Today, I’m going to take a look at the PE10 of the UK’s largest listed telecoms company, Vodafone (LSE: VOD) (NASDAQ: VOD.US).

Is Vodafone’s PE10 misleading?

Vodafone has a history of acquisitions, some of which have arguably been overpriced. As a result, Vodafone also has a history of making large goodwill impairments, such as last year’s £7.7bn write-down of its recession-struck businesses in Spain and Italy.

All of this means that Vodafone’s reported earnings have often been much lower than its headline gross profit and revenue figures would suggest. This gives the company’s shares a very high PE10, as these figures show:

  Trailing
P/E
PE10
Vodafone 12.4 122.0

Goodwill impairments are not cash losses, and so do not affect the underlying profitability of a business. Although Vodafone’s reported earnings per share were just 0.87p last year, its adjusted earnings — which excluded impairments — were 15.65p per share, giving Vodafone a trailing P/E ratio of 12.4.

This is substantially lower than the FTSE 100 average of 16, and given Vodafone’s above-average yield of 5.3%, suggests that the telecoms operator could be a strong buy.

Is Vodafone a buy?

I believe Vodafone will continue to offer an attractive dividend income, and may, in time, deliver a decent capital gain from today’s 194p share price.

However, there are two key questions for shareholders:

1. Will the firm’s management sell its 45% stake in Verizon Wireless, which paid a £6.4bn dividend to Vodafone last year and is thought to be worth $100bn?

2. Could Vodafone’s management find a suitable replacement assetfor Verizon Wireless and avoid overpaying for it?

The answer to both of these questions isn’t clear to me, but for now, I’m giving Vodafone CEO Vittorio Colao and his team the benefit of the doubt, and rating Vodafone shares as a buy.

Can you beat the market?

If you already own shares in Vodafone, then I’d strongly recommend that you take a look at this special Motley Fool report. Newly updated for 2013, it contains details of top UK fund manager Neil Woodford’s eight largest holdings.

Mr. Woodford’s track record is impressive: if you’d invested £10,000 into his High Income fund in 1988, it would have been worth £193,000 at the end of 2012 — a 1,830% increase!

This special report is completely free, but availability is limited, so click here to download your copy immediately.

> Roland owns shares in Vodafone but does not own shares in any of the other companies mentioned in this article. The Motley Fool has recommended Vodafone.

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.

More on Investing Articles

A pastel colored growing graph with rising rocket.
Investing Articles

2 FTSE stocks that demonstrate the best (and worst) of the AIM market

Our writer looks at the performance of two very different FTSE stocks that highlights the pros and cons of investing…

Read more »

Mature Caucasian woman sat at a table with coffee and laptop while making notes on paper
Investing Articles

With a P/E ratio of 8 and selling for pennies, is this FTSE 250 share a bargain?

Christopher Ruane digs into a cheap-looking FTSE 250 share that sells an iconic product and considers whether it's really a…

Read more »

Warren Buffett at a Berkshire Hathaway AGM
Investing Articles

Could the stock market crash in 2025?

Our writer considers some possible drivers for a stock market crash. Rather than try to time it, he's wondering how…

Read more »

Investing Articles

Why do so few people build a passive income?

For those putting a little money away, far more choose savings accounts over aiming to make a passive income from…

Read more »

Passive income text with pin graph chart on business table
Investing Articles

Could putting £20,000 into FTSE 100 stocks get me monthly passive income of £2,756?

The FTSE 100 is full of dividend shares offering generous returns. Our writer considers how much income he could generate…

Read more »

Hand of person putting wood cube block with word VALUE on wooden table
Investing For Beginners

At fresh 52-week lows, is this the best value stock in the FTSE 250?

Jon Smith considers a value stock that's currently at low levels due to recent news, but he feels it shouldn't…

Read more »

Investing Articles

The Burberry share price rises on takeover rumours. But I still don’t want to buy

Speculation about a possible takeover sent the Burberry share price higher. However, our writer’s steering clear of the luxury fashion…

Read more »

Businesswoman calculating finances in an office
Investing Articles

With the rise in Barclays’ share price, £2k invested 5 years ago is worth this much

City analysts predict robust earnings increases ahead for Barclays, so can the upwards momentum of the share price continue?

Read more »