10.8% yield! Is something wrong with Vodafone shares?

Vodafone shares are trading at prices not seen for 25 years. Roland Head explains what’s happening and why he thinks a buying opportunity could be emerging.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Young black man looking at phone while on the London Overground

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

As a keen income investor, I’m finding it hard to ignore Vodafone (LSE: VOD) shares at the moment.

This FTSE 100 stock’s plummeting performance has left the shares offering a dividend yield of 10.8%, based on last year’s payout. I’m tempted by the income.

But the market’s harsh view of the stock — down 40% in a year — suggests to me that problems may lie ahead. Should I take the risk? I’ve been taking a fresh look.

A turning point?

Vodafone’s original vision was to bulk up so it could benefit from economies of scale. The group owns major networks in much of Europe and is also one of the largest operators in Africa.

But while I like the faster-growing African business, this story just hasn’t worked out in Europe.

The world has moved on since the early 2000s. Mobile operators face tough competition and continual demand for increased data capacity. Vodafone is huge, but its returns on capital are too low. In short, it’s just not profitable enough.

The need to continue investing in its networks — over €8bn a year more recently — has left the group with a lot of debt and a stretched dividend.

Time to break up?

City analysts believe the group could be worth more if it was broken up. New chief executive Margherita Della Valle has made some early moves in that direction.

In the UK, she’s agreed the outline of a merger with rival network Three. If the deal is approved by the regulator, the combined business would have a 30% market share and could generate cost savings of up to £700m a year.

Vodafone has also agreed a roaming deal with smaller rival 1&1 in Germany and is continuing to sell down its stake in the Vantage Towers business. This has raised €5.4bn, so far.

Job cuts are also underway — 11,000, in total. Alongside this, Della Valle plans to give regional divisions more independence. I reckon these measures could help to lift profit margins.

Is the dividend still safe?

Vodafone’s first-quarter results covered the three months to 30 June and showed some signs of improvement. Service revenue rose by 3.7% during the period, excluding the impact of exchange rates.

In Vodafone Business, which is one of the more profitable parts of the group, service revenue rose 4.5%. In Africa, service revenue was up 9%.

Della Valle left profit guidance for the year unchanged in July’s update. As things stand, my sums suggest the dividend remains affordable, but only just.

I think there’s still some risk of a dividend cut. But if I was looking to invest in a turnaround situation, I might consider Vodafone.

Two big industry investors have bought stakes in the group over the last couple of years. I reckon they must see some value in the group’s assets.

I also believe that Vodafone has some good assets that are attractively valued. In my view, we may finally be getting close to the time when some of that value is released for shareholders.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Roland Head has no position in any of the shares mentioned. The Motley Fool UK has recommended Vodafone Group Public. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Young Asian man drinking coffee at home and looking at his phone
Investing Articles

2 recession-resistant UK stocks I’d buy and hold for a decade!

Our writer details two UK stocks she believes could still continue to perform well in a recession and not feel…

Read more »

Back view of blue NIO EP9 electric vehicle
Investing Articles

Down 31% this year! Is now the moment to buy NIO stock?

NIO stock has moved sharply downwards in the past couple of months. Christopher Ruane likes the business potential -- but…

Read more »

Smart young brown businesswoman working from home on a laptop
Investing Articles

2 dividend stocks I reckon could grow payouts for years to come!

This Fool is looking for dividend stocks and explains why these two picks could be primed to grow their payouts…

Read more »

Arrow symbol glowing amid black arrow symbols on black background.
Investing Articles

Should I buy, sell, or hold my Rolls-Royce shares at £3.50?

This Fool considers what he should do with his Rolls-Royce shares following the FTSE 100 company's excellent full-year results last…

Read more »

Couple working from home while daughter watches video on smartphone with headphones on
Investing Articles

With a spare £280, here’s how I’d start buying shares this March

Our writer reflects on what he has learnt on the stock market to explain how he would start buying shares…

Read more »

Businesswoman calculating finances in an office
Investing Articles

Are these expensive FTSE 100 stocks actually brilliant bargains?

Paul Summers takes a closer look at two FTSE 100 stocks that could recover strongly in time, despite already carrying…

Read more »

Investing Articles

What might the recent Aviva share price performance tell me as an investor?

Christopher Ruane looks at how the Aviva share price has performed over the past 12 months and considers whether he…

Read more »

Investing Articles

Down by a quarter, is the BT share price a steal?

The BT share price has more than halved in the past five years. What is holding it down -- and…

Read more »