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.
