Vodafone (LSE:VOD) shares have crashed nearly 60% over the past five years. Once the UK’s largest listed company, today it’s 26th.
Does this mean it’s a bargain?
Ways to grow
How can I judge its bargain (or not) status? McKinsey is a management consultancy whose research is viewed as authoritative and insightful.
I’m therefore going to measure Vodafone against McKinsey’s 10 rules for achieving value-creating growth, based on a study of thousands of listed companies.
1. Put competitive advantage first
A high return on capital employed (ROCE) indicates a strong competitive advantage. But in the UK, Spain and Italy — which account for 34% of its service revenue — Vodafone’s ROCE is below its cost of capital. In other words, it’s not making enough to cover the cost of funding its operations.
2. Make the trend your friend
In 2023, only 22% of its revenue was derived from outside Western Europe. This is a problem because the rest of the world is expected to grow faster.
3. Don’t be a laggard
McKinsey reckons outgrowing the industry in which a company operates is worth, on average, an additional five percentage points of shareholder returns each year. Over the past five years, revenue has grown by under 5% as the global telecoms market has expanded nearly 13%.
4. Turbocharge your core
Concentrating on a company’s core industry is another way to success. Vodafone’s primary market is Germany, which contributed 30% of revenue in 2023. But it’s performing badly. Comparing 2023 with 2022, revenue and earnings were both down.
5. Look beyond the core
McKinsey found that companies that grew into adjacent industries generated an extra 1.5 percentage points per year of shareholder returns above their industry peers. But Vodafone has no plans to diversify.
6. Grow where you know
Better growth rates are achieved if a company expands into a new industry that is similar to its core. As noted above, this isn’t on the telecom giant’s radar.
7. Be a local hero
While the British firm’s UK revenue grew by 3.6% in 2023, its profits fell by 3.2%.
8. Go global if you can beat local
Companies that are treading water at home were found to benefit less from international expansion. The proportion of revenue earned from the UK (9.2%) was the same in 2022 and 2023.
9. Acquire programmatically
Instead of buying new companies, it’s been selling some of its interests. The company has disposed of its operations in Hungary and Ghana.
10. It’s OK to shrink to grow
McKinsey advises ruthlessly pruning if necessary. But Vodafone’s recent disposals are tinkering at the edges rather than fundamentally changing its structure.
The view
I don’t think Vodafone meets any of these 10 rules.
Despite the recent share price fall, this doesn’t suggest it’s the bargain of the century. The stock is now yielding over 10%. But the dividend could be cut if results don’t improve.
However, it’s not all bad news. Debt fell by 20% during its last financial year. And Kantar reckons its still the most valuable British brand.
As a shareholder I’m disappointed with the lack of growth. But I’m not going to sell. The new CEO has acknowledged many of the problems identified above and is adopting the slogan “Vodafone must change“.
I hope it does.
