Vodafone (LSE:VOD) shares have been hammered this year. And that’s concerning as, on face value, defensive-oriented stocks such as telecommunication companies should be outperforming. However, the stock is down 27% over the past six months.
The telecoms giant is probably a much larger company than many people realise. It is one of the sector’s biggest pan-European firms, with an empire spanning 22 countries and three continents. Vodafone also has 184.5m mobile users in Africa and is a regional financial services leader. But debt is an issue.
Disappointing returns
If I had bought £500 of Vodafone shares three years ago, today I’d have around £315, plus dividends. That’s clearly not a good return. The stock is down 37% over the past three years. Nearly £20bn has been wiped off the company’s share price in that time.
Headwinds
Vodafone is a truly massive company. It has an enterprise value of around €90bn, but carries sizeable debts, amounting to €45.5bn at the last count. And that doesn’t include €12bn of lease liabilities.
However, it should be noted that not all of this debt is immediately concerning. Around €50bn of the amount is held in bonds with maturity dates from today until 2059. And a deal to sell its stake in Vantage Towers could raise about €5.8bn.
Reasons to be cheerful
Last week, the firm said that guidance for underlying cash profit before leases has been lowered from €15bn-€15.5bn to €15bn-€15.2bn. However, that’s not entirely surprising. Inflation has been rising so quickly this year that many companies have struggled to react and pass those costs onto customers — if they can.
Fortunately, Vodafone is one of those companies that can pass costs on to its customers. It can be seen as a defensive stock because utilities, such as broadband and phone contracts, tend to be considered necessities in this modern day. And that also gives it pricing power.
Price hikes throughout Europe are already underway, with seven markets now linking prices directly to inflation. More price increases are expected in the coming months as Vodafone attempts to pass higher costs on to its customers.
Vodafone has also been hedging energy costs well. The firm is 85% hedged for the year and 40% hedged into FY24. As a result, energy costs to Vodafone should increase by 20% this year, and that’s positive as spot prices have soared.
Should I buy Vodafone shares now?
I find Vodafone a little chaotic. It’s huge and it’s far more than just a telecoms firm. For example, more than 52m people use its M-Pesa platform, which processed €19.9bn of transactions in the last 12 months.
The dividend is sizeable at 8%, but it’s had to be cut twice in the past decade to ensure the stability of the firm’s balance sheet. So, while the yield is attractive, the dividend coverage (1.23) last year highlights that it might not be sustainable.
Moving forward, the firm is looking at a Free Cash Flow yield of 8.5% — which is very high — versus peers that are currently trading at 7.8%.
Right now, I’m not buying and that’s because I’m concerned the dividend will be cut — in turn that would negatively impact the share price.
