There are some FTSE 100 stocks that regularly feature on the list of most popular buys on investment platform Hargreaves Lansdown. Battered engineer Rolls-Royce and under-pressure International Consolidated Airlines often fight it out for the top spot, for example. Lloyds Bank is also one of the most traded shares on the London market. Last week however, it was the turn of another top-tier member.
That company was telecommunications giant Vodafone (LSE: VOD).
Vodafone shares: what’s the draw?
Vodafone shares might be attracting buyers for a couple of reasons. For one, the blue-chip looks pretty reasonably valued, at least relative to other stocks in the FTSE 100. At last Friday’s close, the £33bn-cap was trading at 14 times forecast earnings.
A potential second reason is the dividend stream on offer. Analysts currently have the company returning the equivalent of 7.66p per share for this financial year (ending 31 March). That gives a giant yield of 6.4%. For perspective, there are only eight companies in the FTSE 100 offering more. Those cash payouts look even more tempting when you consider that even the best instant access Cash ISA offers a paltry 0.65% in interest.
On top of this, Vodafone is clearly making progress at an operational level. Its tower division — Vantage Towers — has now been spun off and listed. More recently, the company reported a better-than-expected 3.3% increase in service revenue over Q1.
Lagging the FTSE 100
As popular as Vodafone is at the moment, there are a few things I’d need to be aware of if I were to queue for the shares. The first of these relates to how likely it is that those dividend payouts may need to be reduced.
Right now, that huge yield is covered only 1.1 times by profits. Ideally, I’d be looking for this ratio to be higher (twice-covered would be ideal). In addition to this, Vodafone’s net debt has ballooned in recent years. That could prove problematic if/when interest rates rise.
There’s also the lacklustre share price performance to consider. Vodafone’s stock is up only 2% in value over the last year. The FTSE 100 index has fared better — rising 18%.
The long-term picture isn’t encouraging either. Since 2016, Vodafone shares have halved in value! Meanwhile, the FTSE 100 is up 5% and the S&P 500 index has more than doubled.
All this highlights an issue that investors face when deciding what to buy. I don’t just need to question whether the rewards are worth the risk. I also need to think about what gains I may be giving up by not being invested elsewhere.
On this note, it’s interesting that Vodafone didn’t feature on the list of most popular sells at Hargreaves Lansdown last week. Perhaps many of those buying now are in for the long term? Over such as short period of market activity, it’s impossible to know.
Despite its recent popularity, I suspect it’ll take time for the Vodafone share price to really get going. For this reason, I’d only consider joining other investors and buying this FTSE 100 stock today if I were looking to build a portfolio focused solely on generating income.
Considering the potential threats to the dividend, I’d also make sure I was sufficiently diversified to ensure that any damage from a cut, should one come, is limited.
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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has recommended Hargreaves Lansdown and Lloyds Banking Group. 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.