The FTSE 100 has had a tough time in 2022, down almost 5% year to date, combined with significant volatility and extended downturns throughout the year. Consequently, this has made it incredibly difficult to decide where I should put my money. The sectors I considered favourites have suffered just as intensely, making finding the right opportunity harder than in pre-pandemic times.
For this reason, I have decided to look at the primary UK market, as the higher market capitalisations, combined with international exposure, may help to improve performance over the coming years and stabilise the share price in the short term. To find the right opportunities within this index, I have decided to filter the 100 shares by those trading near their lowest levels this year.
Poor share price performance
My filter identified Vodafone Group (LSE: VOD), the mobile and fixed-line network provider operating in the UK and EU. According to my index screener, the company hit its year-low share price in the last three days and is down 12% in 2022. Furthermore, it has been a tough few years for Vodafone, consistently generating negative share price returns over the last five years.
Underlying fundamentals
Despite this poor share price performance, the underlying fundamentals have some encouraging signs. Profit margins are strong and almost 50% above the three-year average. Free cash generation is impressive and has been at this elevated level for the last few years. The efficiency of returns generated from invested capital is low. However, it is above the three-year average again, so this is an encouraging sign.
Another encouraging sign is that Vodafone currently offers a dividend yield of 7.9%, which is forecast to reach 8% next year. Not only is this level considerably higher than the index average of 4.1%, but it has been paying this dividend for 30 years consistently. This is a very promising sign, as consistent dividend income could help to partially offset the poor share price performance over the last few years.
Potential issues
However, it is essential to note several less positive signs within Vodafone’s fundamentals. The company currently has a very high level of borrowing, with a debt-to-market capitalisation ratio of 215%. This is high in and of itself and has significantly increased from the 159% average level over the last three years.
In addition, earnings growth has slowed considerably, with turnover forecast to grow by just 0.5% in 2022. The three-year average has still only been 1.4%. Furthermore, earnings before interest and tax (EBIT) are forecast to decline by almost 11% next year, indicating that the share price underperformance may continue.
Therefore, I would not want to add Vodafone Group to my portfolio at this moment. Still, I would be keen to watch the company in 2023. The share price declines, combined with high dividend yield, could present a substantial opportunity, although monitoring underlying earnings and debt levels will be essential.
