The Motley Fool

Hargreaves Lansdown investors are buying Vodafone shares. Should you buy too?

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.

Businessmen teamwork brainstorming meeting.
Image source: Getty Images

Vodafone (LSE: VOD) shares appear to be popular with UK investors at the moment. Believe it or not, Vodafone was the most bought stock on the Hargreaves Lansdown platform last week. Perhaps these investors see value. After all, Vodafone’s share price is down approximately 20% this year.

Should you follow the crowd and buy Vodafone shares? Let’s take a look at the investment case.

One Killer Stock For The Cybersecurity Surge

Cybersecurity is surging, with experts predicting that the cybersecurity market will reach US$366 billion by 2028more than double what it is today!

And with that kind of growth, this North American company stands to be the biggest winner.

Because their patented “self-repairing” technology is changing the cybersecurity landscape as we know it…

We think it has the potential to become the next famous tech success story. In fact, we think it could become as big… or even BIGGER than Shopify.

Click here to see how you can uncover the name of this North American stock that’s taking over Silicon Valley, one device at a time…

Does Vodafone have growth potential?

Whenever I’m researching a stock, one of the first things I look at is growth. In the long run, it’s growth that drives share prices higher. I look at the company’s recent revenue growth and I also look at what could drive its revenues higher in the future.

Looking at Vodafone’s recent growth, I can’t say that I’m too impressed. Over the last three years, revenue has declined about 6%. Meanwhile, in its first-quarter results, issued on 24 July, total revenue for the quarter was down 1.4%.

Looking ahead, are there any growth drivers that could power Vodafone shares higher? Well, there is 5G. This technology looks set to be a game-changer for many industries.

However, 5G infrastructure is also going to cost telecommunications giants like Vodafone an awful lot of money. According to research firm Gartner, worldwide spending on 5G infrastructure is set to almost double to $8bn this year. So, Vodafone may not be a huge beneficiary of this technology. If I was looking to profit from 5G, I’d be looking at chipmakers and device manufacturers (you can find some good information on 5G stocks here at The Motley Fool).

Overall, I’m not excited by the growth story at Vodafone.

Dividend appeal

What about dividends? Do Vodafone shares have income appeal? Looking at Vodafone’s dividend, I have my concerns.

Firstly, the prospective yield is high, at about 7%. This indicates that the market has doubts in relation to the sustainability of the dividend.

Secondly, earnings are not expected to cover the dividend payout this year. The current earnings per share (EPS) forecast is 6.7 eurocents while the dividend forecast is nine eurocents. That gives a dividend coverage ratio of 0.74. That’s very low.

Third, Vodafone recently cut its dividend. That’s a red flag, in my view. Once a company has cut once, it may cut again.

Additionally, Vodafone has a stack of debt on its balance sheet. In its full-year results, issued in May, the company reported net debt of €42bn. This adds risk. Going forward, the company may have to cut its dividend in order to reduce debt.

So, I wouldn’t buy Vodafone shares for the dividend.

Is Vodafone’s share price a bargain?

Finally, let’s look at the valuation. Are Vodafone shares a bargain?

As mentioned, the current EPS forecast for this year is 6.7 eurocents. This means that at the current share price, Vodafone’s P/E ratio is 19.4.

That seems high to me. I don’t see a lot of value right now. 

Vodafone shares: I think you can do better

Putting it all together, I don’t see Vodafone shares as a ‘buy’ right now. To my mind, there’s not enough growth and the dividend looks risky.

All things considered, I think there are much better stocks to buy at the moment.

One Killer Stock For The Cybersecurity Surge

Cybersecurity is surging, with experts predicting that the cybersecurity market will reach US$366 billion by 2028more than double what it is today!

And with that kind of growth, this North American company stands to be the biggest winner.

Because their patented “self-repairing” technology is changing the cybersecurity landscape as we know it…

We think it has the potential to become the next famous tech success story.

In fact, we think it could become as big… or even BIGGER than Shopify.

Click here to see how you can uncover the name of this North American stock that’s taking over Silicon Valley, one device at a time…

Edward Sheldon owns shares in Hargreaves Lansdown. The Motley Fool UK has recommended Hargreaves Lansdown. 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.

Our 6 'Best Buys Now' Shares

Renowned stock-picker Mark Rogers and his analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.

So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. Because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply click below to discover how you can take advantage of this.