FTSE 100-member Vodafone’s share price has slumped 33% in 1 year. This is what I’d do now

Vodafone Group plc’s (LON: VOD) share price could offer FTSE 100 (INDEXFTSE:UKX) outperformance in the long run, in my opinion.

| 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 last year has seen a continued downfall for the Vodafone (LSE: VOD) share price. It has declined by 33% in just 12 months, with investors now appearing to view it very differently than they did just a few years ago.

Back then, it had almost utility-like status in the eyes of investors. Its dividend was high but reliable, while its growth prospects were steady and robust. Now, though, it is viewed as somewhat risky by investors, with its financial outlook causing a degree of fear among investors.

Could it now offer recovery potential? Or, is it worth avoiding alongside what appears to be an overpriced stock that released a trading update on Monday?

High valuation

The company in question is safety and regulatory compliance specialist Marlowe (LSE: MRL). Its 2019 financial year saw good progress for the business, with its revenue rising by 62% to £130m. Acquisitions and broad-based organic growth contributed to its improved performance, while adjusted EBITDA (earnings before interest, tax, depreciation and amortisation) is due to be slightly ahead of expectations.

Although the company appears to have a bright financial future, with its bottom line forecast to rise by 15% in the current year, it seems to be overpriced. For example, Marlowe trades on a price-to-earnings growth (PEG) ratio of 2.2, which suggests that it lacks a margin of safety. Therefore, it may be worth avoiding at the present time, with there being better-valued opportunities available elsewhere.

Low valuation

By contrast, Vodafone now seems to offer a wide margin of safety. Clearly, it is unusual for a FTSE 100 company with the track record of dividend payments that Vodafone has to experience such a large share price fall at a time when the wider index has fared much better.

However, investors now seem to be anticipating a lower growth rate in earnings over the long run. The company’s shares trade on a price-to-earnings (P/E) ratio of around 14, while their dividend yield of over 9% suggests that there is a lack of confidence among investors regarding dividend growth. Indeed, there are concerns among some investors that a dividend cut may be ahead, such are the financial commitments resulting from an aggressive acquisition and investment strategy.

A change in management may mean a period of greater instability in the short term. But the company’s fundamentals suggest that it could offer strong growth. As well as a fair valuation and a high yield, the company’s performance outside of Europe was strong according to its recent update. Changes being made to its structure could create a simpler business that is better positioned to deliver improving earnings growth.

Therefore, for income and value investors alike, now could be the right time to buy Vodafone. It could offer recovery potential in the long run as a result of a favourable risk/reward ratio.

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.

Peter Stephens owns shares of Vodafone. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

The National Grid share price nosedived 21% in 2 days! Is it time to take advantage?

The National Grid share price tumbled after the company surprised shareholders by revealing plans to raise more money via a…

Read more »

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

How I’d try to ironclad my second income before interest rates fall

Jon Smith explains a couple of tactics he's looking to implement in his dividend portfolio to try and protect his…

Read more »

Investing Articles

The FTSE 100 still looks cheap to me. But don’t just take my word for it!

The FTSE 100 (INDEXFTSE:UKX) has increased 7.5% since the start of 2024. But I think there’s evidence to suggest that…

Read more »

Investing Articles

What should the Vodafone share price be? Here are 3 possible answers

Our writer uses a number of popular financial measures to come up with an estimate of a fair value for…

Read more »

Investing Articles

Here’s how much I’d have if I’d bought 1,000 shares in this FTSE 100 defence stock 5 years ago

I could have made a pretty penny investing in this leading FTSE 100 defence stock. Now I’m looking at a…

Read more »

Investing Articles

1 potential millionaire-maker UK stock I’d like to buy for the long haul

For long-term investors, here’s 1 UK stock to consider buying right now with the potential to help power a growth…

Read more »

Man writing 'now' having crossed out 'later', 'tomorrow' and 'next week'
Investing Articles

These cheap UK shares look way too good to ignore right now

With the UK stock market reaching new highs recently, this Fool plans to grab these two remaining cheap shares before…

Read more »

Young Woman Drives Car With Dog in Back Seat
Investing Articles

This unloved UK stock could rise 120%, according to a City broker

Some City analysts reckon a once-popular UK stock can recover from its massive recent decline and go on to more…

Read more »