As an old telecoms engineer, I’ve followed the sector for decades. And in 2020, after years of not liking it, I’ve turned bullish on Vodafone (LSE: VOD). We’re looking at a share that’s fallen 40% in five years, but I think things are finally turning. The Vodafone share price is down 13% year-to-date, alongside the FTSE 100. But that hides a strong recent performance.
Since the start of November, Vodafone shares have climbed 26%. Some of that is down to the general market uptick, for sure. But with the Footsie gaining 18% over the same timescale, there’s clearly an extra Vodafone factor.
Before I look more closely at Vodafone, I’ll turn to some news from another telecoms firm I’ve watched for some years. It’s TalkTalk Telecom, which released half-year results on Thursday. The results look generally positive. But everything is eclipsed by another event that renders them essentially meaningless for investors now.
TalkTalk confirmed a recommended acquisition, by Tosca IOM Limited. The deal, which has the support of the TalkTalk board, will pay shareholders 97p per share. That’s a premium of 16.4% over the TalkTalk share price on 7 October, the day the offer period commenced. As I write, you could sell TalkTalk shares for 99p on the open market, but I have no idea who’s paying over the odds for them. Anyway, let’s get back to the Vodafone share price.
The decline is reversing
Despite Vodafone’s strength since November, I think it still represents attractive long-term value. The years-long decline had been down to a number of factors. One, in my view, was what I saw as the firm’s disjointed business approach.
When we might expect a worldwide company to be more than the sum of its parts, all I could see were the parts. Vodafone’s mess of global businesses just did not look joined up. But the company has focused itself better these days, and I see more of the future 5G telecoms giant that surely lies beneath.
Vodafone’s excessive dividend was another problem. For years, the company paid fat dividends that didn’t come close to being covered by earnings. That was while building up a big pile of debt, and watching the Vodafone share price slide. Was Vodafone supposed to be a telecoms company, or was its prime purpose to borrow money to hand over to shareholders? It was hard to tell.
Vodafone share price collapse
That has changed now too, even if not to the degree I would like. Vodafone cut its dividend by 40% in 2019. But even after that, we will not see cover by earnings for the year to March 2021. And forecasts for the following year would see cover of only a very thin 1.06 times. Still, the City expects some strong earnings growth in the coming years. And that would provide strengthening dividend cover.
Meanwhile, investors have backed away from affording Vodafone a premium valuation. In 2016, they had pushed the P/E to over 40. Had the Vodafone share price not subsequently collapsed, 2020 earnings would have put it on a P/E of 55. As it happens, 2021-22 forecasts now suggest a multiple of just 14. I rate Vodafone a FTSE 100 growth buy at that valuation.
