Spare a thought for Vodafone (LSE:VOD) shareholders. While 2023 was a great year for many stocks, the Vodafone share price didn’t join the party. In fact, the global telecommunications provider underperformed the FTSE 100 index by a significant margin.
So, what went wrong? Could the stock make a comeback this year? And are Vodafone shares now in deep value territory?
Here’s my take.
Lofty debts
Vodafone’s difficulties didn’t start in 2023. Profits have stagnated for a long time while investment in 5G infrastructure has proved costly. In that context, it’s unsurprising the share price has declined 56% over five years.
Net debt stands at €36.2bn after rising by €2.9bn in the first half. That looks high to me measured against a market cap below £19bn.
Efforts are under way to streamline operations and bolster the balance sheet through various disposals. However, such measures only go so far in addressing the fundamental issues affecting the business.
Mixed financial results
Underlying cash profit was at a standstill, advancing just 0.3% to €6.4bn in the first half. Admittedly, the company returned to growth in Germany, which accounts for 31% of group service revenue.
This is promising, but further progress will be needed considering revenue in the country shrank over the five previous quarters.
Moreover, new CEO Margherita Della Valle plans to axe 11,000 jobs over the next three years with a view to revitalising the company’s growth prospects.
There’s little doubt Vodafone needs a leaner business model, but big layoffs on their own won’t necessarily translate into growth for the share price.
A massive dividend
More encouragingly, Vodafone shares offer a whopping 11.2% dividend yield. That’s higher than all other FTSE 100 stocks currently. Chunky dividend payouts helped to soften the blow for investors dealt by last year’s share price fall.
That said, forecast dividend cover is just one times anticipated earnings. This is well below the two times threshold that generally indicates a wide margin of safety.
If Vodafone fails to revive its ailing fortunes soon, dividend cuts could potentially be on the near horizon. Investors would be wise to exercise caution if passive income’s a priority.
Merger hopes
One big hope for the Vodafone share price this year is the prospect of a merger with Three UK. This would allow the company to benefit from greater economies of scale.
Indeed, a pledge to invest £11bn in 5G infrastructure if the tie-up gains approval could give the newly-formed telecoms outfit a competitive advantage.
However, regulatory approval isn’t guaranteed. Concerns surrounding possible price hikes and national security could yet torpedo the firm’s hopes. Plus, even if the merger goes through, integration costs might limit the potential upside for shareholders.
A value stock to buy?
Overall, I have major concerns about Vodafone shares. Granted, at a price-to-earnings (P/E) ratio of just 2.1, potential investors may be compensated for taking on the risks. The stock does look cheap.
However, I’m yet to be convinced the firm’s making sustained progress. Underlying profit growth remains pedestrian and, if the proposed merger fails, investors could lose confidence in the company.
As such, this stock will remain on my watchlist for now. I see better investment opportunities elsewhere for 2024.
