The Vodafone (LSE: VOD) share price has fallen 25% since its 52-week high in February. And over the past five years, it’s down more than 50%. I’m looking at Vodafone as a buy candidate now.
I think Vodafone shares have been overpriced in the past, and part of the recent fall has been a much-needed correction. But it looks overdone.
What do I most like about Vodafone? Its dividend yield, now pushed as high as 7.5%.
Record dividend year?
Some investors are getting twitchy about 2022 dividends, as inflation is putting the squeeze on consumer demand. But, according to AJ Bell‘s latest update, FTSE 100 dividends still look set to come very close to the record set in 2018 — and could even beat it.
Forecasts suggest a cash payout of £81.5bn in 2022, which I find quite remarkable against the current negative investing sentiment. And it reminds me again of how important it is for long-term investors to ignore short-term worries and keep on buying. Especially dividend shares.
Actually, to echo billionaire investor Warren Buffett’s call to be greedy when others are fearful, it looks to me like a great time to buy now. We should surely welcome market gloom, not fear it.
Dividend risk
Saying all that, there is some risk to Vodafone’s dividend. Forecasts have it covered only 1.0 times by earnings, with no room for safety there. And it was cut in 2018, perhaps ironically in the best year ever for FTSE 100 dividends.
Poor dividend cover isn’t necessarily a bad omen. Dividends are often maintained through a few years of weaker earnings. Vodafone’s earnings grew in the 2021-22 year too, and analysts expect that trend to continue in the coming years.
Debt
Debt is my bigger fear. At 31 March, net debt stood at €41.6bn. At the current exchange rate, that’s £36.2bn. It’s more than Vodafone’s entire market-cap of £27.7bn. At least it seems stable, slightly below 2020’s level.
Vodafone doesn’t seem too concerned by debt though, and puts its net debt to adjusted EBITDAaL multiple at 2.7x, That’s within the target range of 2.5x-3.0x. EBITDAaL is a non-standard measure which adjusts for several lease-related and other items, and it looks fair enough to me.
The company is also in the middle of a share buyback programme. And that suggests it’s not worried about liquidity.
Global outlook
I had other (non-financial) doubts over Vodafone in the past. Essentially, the group looked like a whole load of global telecoms operations that weren’t well connected. But I think that’s improved.
Vodafone has just announced its latest global joint venture. It’s partnered with Altice in Germany, and called it FibreCo. This will be owned 50/50 by Altice and Vodafone Germany. And it aims to install fibre-to-the-home to up to seven million homes over a six-year period.
Verdict
So what’s my verdict? Is Vodafone a no-brainer buy now? If it wasn’t for Vodafone’s high levels of debt, for me it would be, yes. But even with the debt, it’s still high on my candidate buy list.
