With a P/E ratio of 8 and a yield of 11.3%, what’s holding back the Vodafone share price?

Certain valuation metrics suggest that the Vodafone share price is in bargain territory. So why isn’t the stock doing better?

| 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.

Image source: Vodafone Group plc

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

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.

The Vodafone (LSE:VOD) share price has fallen 25% since the start of February 2023.

And the telecoms giant’s stock is now changing hands for 50% less than it was five years ago, in February 2019.

As a shareholder, I find this very frustrating. On paper, the stock looks to offer good value.

So why aren’t investors piling in and taking advantage?

Earnings

In May 2023 — and in November 2023 — Vodafone said its earnings for the year ended 31 March 2024 (FY24) would be “broadly flat“.

The company’s preferred measure of profitability is EBITDAaL (earnings before interest, tax, interest, depreciation and amortisation, after lease costs). This is expected to be €13.3bn, in FY24.

In my view, this is likely to result in adjusted net income of €2.65bn and earnings per share (EPS) of 9.8 euro cents (8.35p).

If I’m right, Vodafone’s price-to-earnings (P/E) ratio is currently around 8. That’s cheap compared to the FTSE 100 average of 11.

Dividends

It’s a similar story when it comes to dividends.

Vodafone is currently returning 4.5 euro cents to shareholders, every six months. Indeed, today (2 February 2024) the company is due to pay its interim dividend for FY24.

In 2024, I’m expecting to receive 9 euro cents (7.6p), which means the stock’s currently yielding 11.3%.

That’s higher than all other FTSE 100 members — the average is 3.9%.

A low earnings multiple and high yield is, in theory, the perfect combination.

It implies that a stock is undervalued and — assuming investors are in possession of all relevant financial information (and act rationally) — it should go up.

In the doldrums

But the lack of upward momentum in the company’s share price suggests that investors don’t believe it can maintain its present financial performance and/or its dividend is likely to be cut.

Personally, I’m not too concerned about the dividend.

It’s been maintained at its current level since its 2019 financial year.

And if it was at risk of being cut, I think it would have been announced when the company’s new chief executive took over in January 2023. Margherita Della Valle could have blamed her predecessor and started her tenure with a clean slate.

A confusing picture

But when it comes to earnings, I think the position is less clear.

The company’s embarked on a restructuring exercise which has seen it dispose of its operations in Ghana and Hungary.

Imminently, it’s likely to complete an exit from Spain. And it’s just started negotiations to sell its business in Italy.

These deals will help the reduce the company’s huge borrowings. But I’m not sure how they will impact on the group’s profitability.

To add to the uncertainty, it’s planning (subject to regulatory approval) to merge its UK operations with Three.

It’s also entered into a “strategic alliance” with e&. And signed a 10-year deal with Microsoft to bring generative artificial intelligence to its 300m customers.

All these sound positive. But the likely future financial performance of the group is a bit of a mystery to me and — probably — other investors.

For its dividend alone, I think the company’s stock offers good value at the moment.

But until the directors can clarify how these structural changes are going to impact Vodafone’s results, I fear its share price is going to continue to tread water.

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.

James Beard has positions in Vodafone Group Public. The Motley Fool UK has recommended Microsoft and 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

Investing Articles

How I’d use an empty Stocks and Shares ISA to aim for a £1,000 monthly passive income

Here's how using a Stocks and Shares ISA really could help those of us who plan to invest for an…

Read more »

Investing Articles

This FTSE stock is up 20% and set for its best day ever! Time to buy?

This Fool takes a look at the half-year results from Burberry (LON:BRBY) to see if the struggling FTSE stock might…

Read more »

Investing Articles

This latest FTSE 100 dip could be an unmissable opportunity to pick up cut-price stocks

The FTSE 100 has pulled back with the government’s policy choices creating some negative sentiment. But this gives us a…

Read more »

A young woman sitting on a couch looking at a book in a quiet library space.
Investing Articles

As the WH Smith share price falls 4% on annual results, is it still worth considering?

WH Smith took a hit after this morning’s results left shareholders unimpressed. With the share price down 4%, Mark Hartley…

Read more »

Investing Articles

The Aviva share price just jumped 4.5% but still yields 7.02%! Time to buy?

A positive set of results has put fresh life into the Aviva share price. Harvey Jones says it offers bags…

Read more »

Investing Articles

Can a €500m buyback kickstart the Vodafone share price?

The Vodafone share price has been a loser for investors in recent years, and the dividend has been cut. We…

Read more »

Frustrated young white male looking disconsolate while sat on his sofa holding a beer
Growth Shares

3 mistakes I now avoid when choosing which growth stocks to buy

Jon Smith runs through some of the lessons he's learnt the hard way over the years about what to look…

Read more »

Warren Buffett at a Berkshire Hathaway AGM
Investing Articles

Should I follow Warren Buffett and sell my favourite shares?

Billionaire US investor Warren Buffett has been selling tons of Apple shares and other stocks of businesses he thinks are…

Read more »