Like many indices, the FTSE 100 has been dragged down in recent months, pushing the average dividend yield upwards. But one stock that seems to be an extreme example of this is Vodafone (LSE:VOD). The telecommunications giant now offers the largest shareholder payout versus any other constituent in the UK’s flagship index. And following a 35% drop in market-cap in the past year, the P/E ratio is now just 2.0!
Needless to say, that looks dirt cheap. So is this a tremendous opportunity to start building a position? Or is there a good reason why the stock has been sold off? Let’s investigate.
Bigger isn’t always better
Vodafone is one of the biggest telecom companies in the UK and possibly even in the world. It’s made massive investments in Europe and has even begun penetrating the African markets as a digital payment provider through its massively popular M-PESA platform.
There’s no denying that the scale of its operations is impressive. But the cost of this expansion wasn’t cheap. And Vodafone has consequently racked up a lot of debt over the years.
This wasn’t much of a problem in the past since interest rates were so low. But now they’re on the rise, the pressure is also rising. And while its African operations are delivering solid growth, the same can’t be said about its core European markets like Germany. In fact, for a while, sales and earnings have been shrinking, understandably spooking investors.
Potential for a comeback?
The problems at Vodafone have been present for several years but were largely masked by low interest rates. Now that’s no longer the case, some drastic action is needed. So it’s encouraging to see management making such moves. Starting with the appointment of a new CEO, Margherita Della Valle.
Della Valle has been with the firm since 1994, working her way up the ranks with plenty of experience in the C-Suite as a CFO. Looking at her strategy, all eyes are on Germany, securing new contracts and streamlining operations to restart growth and stabilise profitability.
Job cuts have already been announced, with more on the way, as well as signing a new deal with 1&1 Moblifunk. So there are some early signs of progress. But with Vodafone’s problems deeply rooted throughout the entire organisation, it will take time to reflect these benefits in the financial results.
To buy or not to buy?
Della Valle’s turnaround strategy sounds viable to me. But it’s not the first time that Vodafone has tried to right the ship. And without a track record to back it up, I’m reluctant to give this dividend stock the benefit of the doubt.
Therefore, I’m not tempted to add any shares to my income portfolio today, even with the impressive yield. However, it’s definitely a story I’ll be watching closely moving forward.
