It’s been a miserable few years for Vodafone (LSE: VOD) shares. They’re down 58% over the last half-decade and now cost only 74p. That’s a 25-year low, by the way. I can invest today for the same price as when the Spice Girls were topping the charts.
Buying shares as cheap as they’ve been since last century sounds nice, but the more important question for me is: are they undervalued? Let’s take a look.
The poor performance of Vodafone led to former CEO Nick Read leaving last year. The new boss, Margherita Della Valle, took the reins in the New Year with the clear and obvious mandate to turn the ship around.
A few critics pointed out that, as former CFO and being with the company since 1994, she wasn’t the breath of fresh air needed to revitalise the telco. Since then, the shares have dropped a further 14%. That tells me investors may have reached a similar conclusion.
She’s been making moves though. The biggest job cuts in Vodafone’s history will see 11,000 employees axed, about 10% of the global workforce. The mooted €250m in savings has been earmarked for investment, which might go some way towards improving the firm’s fortunes.
Efficiency
And recently, it announced plans to merge with mobile operator Three in the UK. There are a few regulatory hoops to jump through before it happens, but if it does, the deal would make the new company the largest telco in Britain.
One of the reasons Della Valle is keen to get this over the line is to improve efficiency, specifically returns on capital employed (ROCE). This is a key metric for telcos, which measures how efficiently a firm is using its assets to generate profits.
For context, rivals EE and Virgin Media O2 both have ROCE levels over 9% whereas Vodafone lags behind at less than 5%. A deal with Three might lead to better efficiency and resource management. This could be crucial with the ongoing 5G rollout.
Yet even if this deal is a success, the UK generates only 13% of Vodafone’s revenues. A bigger issue is that its biggest market, Germany, has been haemorrhaging customers since new regulations made it easier for Germans to get out of contracts. The progress here will be a key detail of the Q1 update next week.
Best dividends
With all the problems though, comes one of the FTSE 100’s best dividends. The annual yield comes in at 10.54%. Current forecasts expect a slight decline but still over 9% in yield for the next two years.
But those dividends aren’t well covered. The latest year was covered by 1.1 times earnings, so the firm is using almost all profits to pay it out. This has been a long-running theme for Vodafone and partly explains the high debt levels the company is dealing with.
In all, there are too many problems here for me to call this bargain of the century. But with an analyst consensus of £1.02 and a forward price-to-earnings ratio of 9.5, there does look to be good value on offer. I’ll keep it on my watchlist for the time being.
