The Vodafone (LSE: VOD) share price dipped at the end of February. But it’s already recovering nicely, and has now climbed 14% so far in 2022. It’s still down a few percent over the past 12 months, but I think we could be seeing the start of a long-term upwards run for Vodafone.
We saw an uptick in profits for the year ended March 2021, and I reckon Vodafone’s valuation looks attractive now. The low share price meant last year’s dividend yielded 5.8%. And I think that’s sustainable.
In the past, Vodafone stuck to paying bigger dividends that were nowhere near covered by earnings. But the inevitable happened, and the dividend was slashed by 40% in 2019. And the shares, once a staple of many an income portfolio, suddenly lost their desirability.
Dividend now stable?
As earnings are growing again now, cover is getting closer. There must still be a risk of further cuts in the rebased dividend, but I think it is becoming less and less likely. I’m convinced it’s time for me to think of Vodafone as a solid income investment again.
The current Vodafone share price puts the stock on a trailing P/E of around 19. Based on Vodafone’s full-year guidance, reiterated with February’s Q3 update, I calculate a forward P/E of approximately 15.
That’s in line with the FTSE 100 average. But Vodafone’s dividends are higher than the index average of a shade under 4%. And I think we’re seeing sustainable long-term earnings growth coming back too. Put those two together, and I see the Vodafone share price as attractive today.
Buyback
Vodafone has been steadily hoovering up its own shares on the open market since commencing a buyback programme in May 2021. The purpose is to offset new share issues as a result of the maturing of convertible bond issues.
It’s good to see the company keeping the number of shares down to neutralise the dilution effect on existing shareholders. And it suggests Vodafone believes it has sufficient cash.
What are the downsides? Debt is the big one, and I can see it weighing on the Vodafone share price for some time yet. It’s the one thing that makes me hesitant to buy. But the company has sold off some assets to help deal with it. And in the process, I think that’s helped Vodafone focus on its core business.
Analysts are predicting further growth in 2023, with net profit reaching £2.8bn. From a loss of £770m in 2020 (at today’s exchange rates), I think that’s an impressive turnaround. It should help towards debt management.
Vodafone share price outlook
Vodafone still faces stiff competition, and I feel a lot of investors will keep watching and waiting. So there’s that, there’s Vodafone’s debt, and there’s lingering uncertainty over dividend stability. As a result, I suspect investor sentiment will remain subdued until we see the proof of the turnaround. And Vodafone share price weakness could continue.
But I’d still buy Vodafone today, as a long-term income investment with some recovery growth potential thrown in.
