Vodafone (LSE: VOD) shares are popular within the UK investment community and I can understand why. This is a well-established FTSE 100 company with a juicy dividend yield.
Are the shares worth buying for my own portfolio though? Or are there better investments out there in 2022? Let’s take a look.
Three reasons to buy Vodafone shares today
There are certainly things to like about Vodafone shares today, in my view. For a start, the company is relatively ‘defensive’ in nature. If we were to see a recession in the near future, I’d expect the business (and the share price) to hold up pretty well, as telecommunications companies typically aren’t badly affected by economic downturns.
This means the stock could potentially provide me with some portfolio protection. I see the defensiveness here as a valuable attribute right now, given the economic uncertainty we’re facing.
Meanwhile, there’s the big dividend on offer here. For the year ended 31 March, analysts expect Vodafone to pay out nine euro cents per share in dividends. At the current share price of 128p, that equates to a yield of about 5.9% – not bad at all in today’s low-interest-rate environment.
Additionally, the company’s profits are expected to rise in the years ahead. For the year ending 31 March 2023, City analysts expect the group to generate earnings per share of 11.5 euro cents, up from 9.9 euro cents (estimated) the year before. If profits keep trending up, the share price could get a boost.
It’s worth noting that the EPS forecast of 11.5 euro cents gives the stock a forward-looking P/E ratio of around 13.2. That seems like a reasonable valuation to me.
Risks to the share price
Having said all that, I do have some concerns in relation to Vodafone shares. One is that the company isn’t generating much top-line growth at the moment.
For the year ending 31 March 2023, analysts expect Vodafone to generate revenue of €46.1bn. That’s below the figure posted for FY2018. The lack of growth here could potentially limit share price upside.
Another concern for me is that profitability is very low. In recent years, return on capital employed – a key measure of profitability that top investors like Warren Buffett and Terry Smith tend to play close attention to – has been terrible.
Between FY2017 and FY2021, it averaged just 2.7%. A company earning this kind of return on capital employed is most likely going to destroy shareholder wealth over time.
Finally, debt is quite high. At the end of September, the group had net debt of €44.4bn on its books. This could be an issue with interest rates now rising because the debt is going to become more expensive to service.
Higher interest payments could potentially have a negative impact on dividend payments here. It’s worth noting that dividend coverage (a measure of dividend sustainability) is low, which indicates we could see a dividend cut in the near future.
Should I buy Vodafone shares today?
Weighing up the benefits of owning Vodafone shares versus the risks, I don’t see the stock as a buy for me right now.
The high yield here does look tempting. However, all things considered, I think there are better shares I could buy today.
