Vodafone’s (LSE: VOD) share price fell to a five-year low in the past week. Typically, I think of such sharp corrections as an investing opportunity since they tend to be sentiment-driven, which stabilises soon enough. I would make an exception in this case, however, given the nature and extent of the company’s challenges.
Depressing financials
To start with, its financials are dismal. The latest results for the year ending March 31 showed a 6.2% decline in revenue, adding yet another data point to the steady revenue reduction seen for the past few years. It also fell back into losses after appearing to turn around in 2018. Further, even though it has reported a reduction in net debt of 8.8%, rating agencies have expressed their discomfort at its on-going levels of leverage. Moody’s cut its debt rating in February this year following the announcement that it was acquiring Unitymedia, the German cable operator.
Following these results, the company cut dividends for the first time in 20 years by 40% and the share price came crashing down along with it. In other words, both growth and dividend investors are now deeply impacted by the company’s continuing troubles.
There are some silver linings, though. Management has a positive outlook for 2020, for instance. Group CEO Nick Read said: “We are making strong progress on the priorities….supporting our outlook for EBITDA growth in FY20.”
But I am not holding my breath for a quick and more importantly sustained turnaround.
Superior alternatives
It is possible that the share price will recover somewhat in the next few months, especially given how sharp the decline has been (at its lowest, 21% below the year’s average price). But a question still remains around whether any share price recovery can last. While the Vodafone story is still playing out, as an investor I would turn my attention to other companies that offer similar shareholder benefits, with lower risk.
Strong and safe
Consider CRH (LSE: CRH), the Ireland-based building materials company with significant operations in the US. It is large, geographically diversified and financially healthy. Since I first wrote about it in March, the share price has risen by almost 10%. While we at the Motley Fool are interested in shares with good long-term growth prospects, an increase over the short-term can be a good indicator that the price is indeed headed in the right direction.
A healthy trading update for the first quarter of 2019 has pushed prices upwards – sales were up 7% compared to the same quarter of last year, earnings are expected to increase by “mid-single-digit” for the first half of the year as well, and the second half outlook is positive.
CRH is smaller than Vodafone, with revenues at a little over 60% the latter’s. But size is no basis for savvy investing decisions. For now at least, it is a strong and growing business, making it a far safer bet in my view.
