The Vodafone (LSE: VOD) share price has been volatile since the beginning of the year. But the stock is up 8% so far in 2021 and over 20% in 12 months.
Of course, past performance is not an indication of future returns and I’m not convinced the stock will rise further in 2021. Here’s why.
I’m going to start with the positives and discuss what I think has been driving the Vodafone share price so far.
I reckon the main catalyst has been that it has now successfully spun out its Vantage Towers business through an Initial Public Offering (IPO) on the Frankfurt stock exchange.
I commented on this back in December and it’s pleasing to see this has now been completed. But why has this helped the Vodafone share price? Well, the company expects €2.8bn from the flotation, which is likely to be used to reduce the debt burden. It’s always good to hear that a company is looking to reduce its liabilities.
Another factor that may be driving the Vodafone share price is its dividend yield. The company is known for its income payments. The stock is currently offering an attractive 6% and I reckon investors are still on the hunt for dividends.
The UK government also recently auctioned a new tranche of its 5G spectrum network. And Vodafone managed to get a slice of the action. I guess this gives investors some confidence that the FTSE 100 company is making advances in the 5G space.
While I commend the telecoms company for attempting to reduce its debt, it still has a long way to go. I feel this could hang over the Vodafone share price and hinder the stock from rising further this year.
According to its interim results last November, the overall net debt position is €44bn. When I convert this into GBP, that’s approximately £38bn. Let me put this into perspective. If an investor purchased Vodafone shares today, they would be buying a stake in a company that has a market capitalisation that’s equal to its net debt position.
This makes me uncomfortable. In fact, I’d go as far to say this doesn’t make investment sense to me. What would change my mind, is to see more evidence of a reduction in its debt.
I mentioned Vodafone’s attractive dividend yield earlier. But what I think is worth highlighting is that it’s not fully covered by its earnings. In 2019, the company cut its dividend and there’s no guarantee the income payments will continue. Revenue was hit by the pandemic and this could happen again. Which means the dividend could be in jeopardy.
I think Vodafone has a long way to go. It operates in an very competitive industry where customers are fickle and go with the cheapest deal.
My main concern is over its debt pile, which I think will take time to bring down to a more manageable position. When looking at the risk-reward profile, I’m not convinced the Vodafone share price will rise further in 2021. Hence I’ll only be watching the stock for now.
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Nadia Yaqub has no position in any of the shares 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.