Is the Vodafone share price a bargain?

The Vodafone share price has been falling and this could be an opportunity, says this Fool, who’s looking to buy the stock.

| More on:

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.

Risk reward ratio / risk management concept

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

The Vodafone (LSE: VOD) share price has been under pressure. The stock has returned around 5% year-to-date, compared to the FTSE All-Share’s near-8%.

Over the past 12 months, Vodafone has returned 0.4%, excluding dividends. The FTSE All-Share Index has returned nearly 20%, excluding dividends. 

However, I think the stock is now trading at such an attractive level it could be worth buying, especially considering its dividend potential.

Vodafone share price on offer

The first thing I do before buying any stock is try to understand why the shares have performed the way they have recently. 

The stock has been under pressure after the company published its results for its financial year ending 31 March. The results revealed the group earned a profit of £3.8bn last year.

But revenues declined from £38.7bn to £37.7bn. Management blamed reduced income from mobile roaming and handset sales during the Covid-19 crisis for this decline. 

The company’s commitment to spend more in the coming years on developing its infrastructure also spooked investors. Infrastructure spending has always been a headwind for the company. Unfortunately, the group can’t skimp on spending. Vodafone needs to keep spending to stay up-to-date with the competition.

Even then, there’s no guarantee customers will stay with the business. Despite spending tens of billions of euros over the past few decades on new equipment, there’s not much differentiating Vodafone from other mobile providers, apart from price.

This is probably the biggest challenge the group faces. It will need to keep spending to stay up-to-date with the competition. But this doesn’t guarantee the company will achieve better returns than any other in the sector. This could be one reason why investors have been avoiding the Vodafone share price. 

Economies of scale

That said, Vodafone does have one key advantage. Size. Not only is it a european telecoms giant, but the company also has substantial operations around the world. Moreover, the firm bulked up its european business last year with the acquisition of Liberty Global.

Vodafone reckons it can achieve €535m a year in operating synergies as part of this deal. I think this clearly shows how size can benefit the group. If management’s correct, the additional cash flow will fund growth projects and reduce debt.

The company’s chunky dividend yield also supports the Vodafone share price. The stock currently supports a dividend yield of 5.5%. 

While some analysts have speculated that the payout could be cut to fund spending, in the current financial year Vodafone expects underlying cash profits of €15.0bn-€15.4bn, and underlying free cash flow of €5.2bn. I think that will be more than enough to cover the company’s dividend. However, nothing’s guaranteed at this point. 

Still, considering the company’s market-beating dividend yield and economies of scale, I think the stock could be a great acquisition to my portfolio after recent declines. That’s why I’d buy Vodafone today. 

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Rupert Hargreaves 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.

More on Investing Articles

Investing Articles

Could Premier African Minerals be a millionaire-maker penny stock?

Shares of Premier African Minerals (LSE:PREM) have crashed over the past year. Is this a golden opportunity for me to…

Read more »

British flag, Big Ben, Houses of Parliament and British flag composition
Investing Articles

Which FTSE defence stock should I buy? Here’s what the charts say

FTSE shares like BAE Systems have been flying higher over the last couple of years as the geopolitical situation has…

Read more »

Shot of a senior man drinking coffee and looking thoughtfully out of a window
Investing Articles

Here’s why investors should consider buying Scottish Mortgage shares today

After a steady rise in recent times, this Fool thinks Scottish Mortgage shares could be worth considering. Here he explains…

Read more »

Young black man looking at phone while on the London Overground
Growth Shares

This FTSE 250 stock keeps blowing broker forecasts out of the water

Jon Smith considers the ever-increasing share price targets for a FTSE 250 stock that has risen by 120% in the…

Read more »

A mixed ethnicity couple shopping for food in a supermarket
Investing Articles

Marks and Spencer shares could rise 29%, according to this broker

Marks and Spencer shares currently sport a P/E ratio of just 10, and one well-known City broker believes the company…

Read more »

Smart young brown businesswoman working from home on a laptop
Investing Articles

2 of the best FTSE 100 beginner stocks to consider buying

The Footsie offers people just beginning their investment journey some of the best stocks to buy. Here are two to…

Read more »

Middle-aged white man wearing glasses, staring into space over the top of his laptop in a coffee shop
Investing Articles

Here’s why the Aviva share price suddenly dived

The Aviva share price suddenly dropped by over 6% the other day. But there's a simple explanation for this sudden…

Read more »

Long-term vs short-term investing concept on a staircase
Investing Articles

With no savings, I’d listen to Warren Buffett to aim for long-term wealth

Warren Buffett looks for "1-foot bars" to step over, not "7-foot bars" to jump. Stephen Wright looks at what this…

Read more »