There’s an old idea, called the efficient-market hypothesis, which claims that share prices fully reflect all known information, and suggests it’s impossible to beat the stock market as all new information is quickly reflected in adjusted share prices.
It’s obviously tosh, as any look at the real world and the way irrational humans work will quickly show.
Overpriced
Vodafone (LSE: VOD) is a good example. For years, its shares looked very highly priced to me. They were on valuations that significantly exceeded those of the company’s peers, after initially soaring back in the days of takeover speculation and never falling back.
There must be a good reason, something I don’t know but which big investors have latched onto, I thought. But no, there was nothing, and since the end of 2017, the shares have been steadily revalued downwards.
They really had, simply, been overvalued in a way the academics claim doesn’t happen, and it’s taken a 40% slump to get us back to where I can see some rational valuation. And, though I’m not a chart-watcher and I recommend caution over what I’m about to say, there are signs that the price has bottomed and is starting to tick up again.
We’re looking at only a modest 8% rise since the first week in March, slightly ahead of the FTSE 100‘s 5%, and that leaves Vodafone shares trading on a P/E of 18 based on expectations for the year just ended in March — results are due on 14 May.
Competition
By comparison, BT Group shares are on multiples of only around eight, but that does have to allow for the company’s massive debts and pension fund deficit, so it’s not an easy comparison. But a P/E of 18 still doesn’t look much like a bargain — until we look at Vodafone forecasts.
After a dip in earnings per share for 2019, analysts are predicting growth in mid-teen percentages for each of the next two years, which would drop that P/E to 15 on 2020 forecasts, and then as low as 13 the following year.
But one thing I still can’t get my head round is Vodafone’s crazy high dividend. Usually I’d see yields like the currently-forecast 9% or so as tempting. But Vodafone’s dividends haven’t been close to being covered by earnings for a few years now, and will still be uncovered as far out as 2021 forecasts.
Vodafone is bleeding cash to pay its dividends, and we’re talking about a company that was carrying net debt of €32.1bn (£27.8bn) at its interim stage at 30 September 2018 — a 6.4% increase on the same stage a year previously. I just don’t see the sense in that.
Third quarter
Looking at the company’s Q3 update in December, comparisons are made tricky by the switch to IFRS 15 accounting standards for the year, and that’s partly responsible for a €0.8bn drop in revenue to €11bn — though the sale of Vodafone Qatar and foreign exchange effects played some part.
A lacklustre performance in Europe was offset by a 4.9% rise in revenue in the rest of the world, but overall the unexciting full-year results predicted by analysts look about right to me.
I am getting the feeling that we really might have seen the bottom, and I reckon the next 12 months could prove pivotal. But for now, I’m remaining cautiously on the sidelines.
