If Vodafone (LSE:VOD) shares are to reach £1.50 in 2024, they will have to more than double from their current level. Although it’s unusual for big companies to see such large swings in their share prices over a short period, it has happened before.
Both Rolls-Royce and Marks and Spencer achieved the feat in 2023. However, both these companies are enjoying increased revenue and earnings.
In contrast — a bit like its network coverage where I live — Vodafone’s performance is patchy.
| Metric | FY22 (actual) | FY23 (actual) | FY24 (forecast) | FY25 (forecast) |
|---|---|---|---|---|
| Group revenue (€m) | 45,580 | 45,706 | 43,538 | 42,481 |
| Adjusted profit before tax (€m) | 5,199 | 4,745 | 3,585 | 4,035 |
But if its shares are to break through the 150p-barrier, I think there are three things that need to change. And, ironically for a company in the telecoms industry, all require better communication.
Ringing the changes
Firstly, the directors need to be clearer about what the future structure of the group will look like. And — most importantly — what it means from a financial perspective.
The company has agreed to sell its business in Spain. And it’s considering a deal to merge its operations in Italy. It’s also announced plans to combine its UK arm with Three.
But as a shareholder, I’m unclear how these changes are going to impact the bottom line.
Shareholder returns
Secondly, I think it needs to have a more transparent dividend policy. There’s been plenty of speculation that it’s going to be cut. And the stock’s high yield suggests the market has already priced this in.
But many large companies avoid this unhelpful speculation by publishing unambiguous policies. These state what proportion of earnings, net assets, or surplus cash they will seek to return to shareholders by way of dividends.
However, Vodafone is silent on the issue, which I believe is holding back the share price.
Personally, with the impending sale of some of its assets, I think it will have sufficient cash to maintain its current dividend throughout 2024.
Improve the balance sheet
Finally, it needs to explain how it plans to tackle its debt problem. I’m sure some of the cash realised from the planned deals will help reduce the burden.
But, at 30 September 2023, its net debt was €36.2bn — nearly 80% of its annual revenue.
2024 outlook
If these three issues can be addressed satisfactorily, I think investors will view the company’s prospects more positively. This might then lead to a re-rating of its stock resulting in the telecoms giant being valued more in line with its peers.
The company’s market cap is currently around £17.5bn. If the 2024 profit forecast proves to be correct, this means the stock has a forward price-to-earnings ratio of 5.7.
However, according to Yahoo Finance, this lags behind the ratios of the three most valuable telecoms companies in Europe — Deutsche Telekom (11.6), Orange (9.5), and Swisscom (14.6).
If Vodafone were to achieve the average of these three valuations (11.9), its share price would be worth 110% more, bringing it very close to 150p.
Although this price target might seem ambitious, it wasn’t that long ago — just before Covid-19 started to take hold in February 2020 — that Vodafone’s shares were at this level.
And with some better communication and a clearer vision for the future direction of the company, I think there’s a small chance that its share price could return to its pre-pandemic value in 2024.
