The Vodafone (LSE: VOD) share price, after a blip in late February, has been doing rather well of late. A year ago it was 108p but at today’s 134p, it’s closing in on the one-year high of 142.44p. The shares clearly have momentum. The question is whether Vodafone is just following the FTSE 100 higher or is there more to it than that?
In other words, could it outperform the FTSE 100 and therefore, would I prefer to buy and hold Vodafone rather than invest in another share or buy a FTSE 100 tracker?
Why the share price is riding high
I think one of the main catalysts for Vodafone’s share price growth is that the telecoms operator raised €2.3bn from spinning out its towers business. Another is likely the opportunity it has to generate revenue from 5G. The UK auction has just been held and Vodafone snapped up 40 MHz, at 3.6 GHz for £176m. It remains to be, of course, seen to what extent the faster speeds can be commercialised by telecoms companies.
One of the bigger factors I think might be helping Vodafone is simply investor appetite for value shares like this, and the market generally going up in recent times. In the year to date, for instance, the FTSE 100 has gone from 6,572 to 6,939, at the time of writing.
I like Vodafone’s dividend yield and I strongly suspect many other investors do too. Since cutting the dividend drastically in 2019, the payout to shareholders has recovered. The shares now yield 5.8%. This is very attractive from an income point of view and makes it a high-yielding share compared to other FTSE 100 companies.
What are the risks with this share?
For me, there are at least two major risks facing Vodafone investors. One is its huge debt. Vodafone’s debt pile has reached €44bn, thanks primarily to the recent acquisition of Liberty Global assets in Europe. A net debt-to-EBITDA ratio of over three times appears quite high to me and adds to my concerns about debt. Spinning out the towers business will help reduce some of this debt, but it also takes away a steady source of income.
That’s especially concerning because the second issue with Vodafone is low growth. Between 2016 and 2020, despite some pretty major acquisitions, revenue declined. In 2016 revenue was £48.9bn. By 2020 it had fallen to around £45bn. I’m wary of a company that can’t even buy growth. One might expect acquisitions to have helped improve the top line of the business.
The final word
Overall, I think the Vodafone share price is starting to look expensive. That’s primarily because the telecoms operator has struggled to grow consistently in recent years. The only reason I’d add Vodafone to my portfolio would be for the income it could provide from dividends.
Other than that, to boost my own portfolio, I think I’d prefer to buy another FTSE 100 share, or even an index tracker, rather than Vodafone shares.
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Andy Ross owns no share mentioned. 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.