Trading for pennies and with a dividend yield approaching 11%, it is easy to understand why a lot of investors might be tempted by the idea of buying Vodafone (LSE: VOD) shares at the moment. But are the shares really the bargain they might seem?
Low price
Certainly, the share price is lower than it has been for much of recent history. Vodafone shares are currently a bit higher than their 52-week low, of just under 70p each.
That means this year they have been trading at a level not seen since 1996.
Record yield
Share price alone does not necessarily tell the full story of a company’s valuation however. Vodafone’s share count is higher than it was back in 1996, meaning the proportion of the company’s earnings that attach to each share has shrunk.
But it is not just the price of Vodafone shares that has been eye-catching of late. What about that double digit dividend yield?
The recent Vodafone dividend yield has been its highest in many years, if not ever. In 2019, the company cut its per share dividend by 40%. However, the higher share price back then meant the yield on offer was actually lower than it is today.
A double-digit percentage dividend yield from a FTSE 100 share suggests that many in the City are pencilling in a dividend cut.
I see that as a risk, given the company’s high debt load. On the other hand, the company cut its debt by around 20% last year while maintaining the payout. That gives me some confidence it can be sustained.
But while the share price is low and the yield is high, in the long run the attractiveness or otherwise of Vodafone shares also rests on the firm’s business outlook.
Sevenfold increase
I think there have been better times to buy Vodafone shares than today. Back in the mid-nineties, the company was about to embark on an aggressive expansion that made it one of the leading global telecoms players.
I could have increased my money sevenfold buying into the company then and selling in 2000. I would be very surprised (although happy!) if Vodafone shares are worth seven times their current price four years from now.
Business prospects
But while today may not resemble the dizzying telecom frontier of the late nineties, I am upbeat about the outlook for Vodafone’s business. It has a massive business with a customer base running into the hundreds of millions. It benefits from a strong brand and is the market leader, or a close contender in many markets.
I think the risks facing the company are significant. As well as debt, there is the vast cost involved in bidding for licenses, building and maintaining networks.
But I think those risks are reflected in the current price. I have bought Vodafone shares for my portfolio in recent months and would happily add more if I had spare cash to invest.
