I continue to look for cheap shares I can buy for my portfolio. Cheapness is not just about price though. It is about value? And what do I pay compared to what I get?
A share that sells for pennies may look cheap, but it might not always offer me good value. Lately, I have been buying more shares in one company for my portfolio while selling up in another. Both shares sell for less than a pound and I think they qualify as cheap shares in some ways. So why do I prefer one over the other?
Vodafone
The share I decided to sell is mobile operator Vodafone (LSE: VOD). I continue to see a lot to like about the company. It has an iconic brand and a leading position in many markets across both Europe and Africa. I expect long-term demand for telecom and data services to grow. It can be annoying to switch providers, meaning many customers are willing to pay relatively expensive prices.
Vodafone trades on a price-to-earnings (P/E) ratio of 15. That might not seem especially cheap. But I think future earnings potential could be higher. The company has signalled that parts of its business could be operated more profitably than they are now. I think its strong industry position gives Vodafone pricing power that is not fully reflected in its current earnings. On that basis, Vodafone shares look cheap to me at their current price.
So why have I sold? Right now, I think there are such great bargains in the UK stock market that I have been reorienting my portfolio to take advantage of that. That included selling my Vodafone stake.
What specifically concerns me about Vodafone is debt. The company has been slimming down this year, selling a majority stake in Vodafone Ghana, alongside the Vodafone Hungary and Vodafone Egypt businesses. But with a net debt of €46bn in its most recent set of financial results, the company’s balance sheet makes me uncomfortable even though asset sales like these can raise cash.
With the current share price in pennies, Vodafone offers me a dividend yield of 7.8%. That is certainly attractive – but I see a risk that the company may cut its dividend in future to help reduce debt, as it did before.
ITV
So what cheap shares have I been buying? Among my recent purchases is the broadcaster ITV (LSE: ITV). I already owned the shares,but added to my position.
In its recent results, the company confirmed that business remains strong. Revenues last year grew to £3.7bn and the post-tax profit also rose, to £388m. Yet the current share price means the P/E ratio for ITV is just 7. That looks cheap to me.
Partly that reflects investor concerns about risks such as a decline in advertising revenues from terrestrial television and the costs of growing the company’s digital footprint. But I see the business as doing a good job of building its digital presence while retaining its traditional cash cow. The dividend yield is 5.9%.
I think Vodafone and ITV are both cheap shares in their own way. But the risk of a dividend cut at Vodafone due to its huge debt pile has seen me head for the door – and buy more ITV shares.
