Huge revenues, multibillion-pound annual profits, falling debt levels, and a double-digit percentage dividend yield higher than any other FTSE 100 company. At first glance, Vodafone (LSE: VOD) might almost seem to have it all. Yet Vodafone shares have hit to a 30-year low this week, selling for pennies each.
Worth less than half of what they were five years ago, could things just continue relentlessly downhill from here?
Or is this the sort of rare buying opportunity of which value investors dream?
What’s going on?
To put things in perspective, the company now has a market capitalisation of under £18bn. That is less than a tenth of the peak back in 2000’s dotcom boom, when Vodafone’s market capitalisation was over a quarter of a trillion pounds.
Market capitalisation is only one part of a company’s valuation. Savvy investors also study the balance sheet. In Vodafone’s case, that shows net debt of €36bn at the half-point stage of its current financial year. That is a lot, although it is 20% less than it was 12 months previously.
I think a couple of things are weighing on investors’ minds.
One is the long-term direction of the business. It has been shedding assets, raising cash in the short term but likely reducing its revenue and profit generation potential in the longer term.
The business has also proven inconsistent when it comes to profits. Telecoms has high costs for licensing and infrastructure. I see that as an ongoing risk. Last year saw large post-tax profits, but the company lost money (on a post-tax statutory basis) in two of the past five years.
Possible value
Are things really as bad as the plummeting Vodafone share price suggests, though? Vodafone has a well-known brand, large customer base, and well-established footprint.
Even after the reduction, the debt level concerns me especially in an environment where interest rates are set to remain higher than they were for a long time.
The shrinking business footprint could cut both ways. On one hand it might not be a sign of a business in growth mode. Then again, focussing on fewer of the company’s big markets could help it improve performance there. That might actually help it improve its profitability.
A dividend cut is a risk. Right now, Vodafone shares offer a 12% yield – something we rarely see in the FTSE 100. But the board has not yet made a cut or signalled it intends to do so. With debt falling, there is an argument that a cut now seems less likely than a year ago.
Plus, even if the payout was reduced, it could still be above the average FTSE 100 yield.
Value in plain sight
In short, I think Vodafone shares look cheap for what they are.
The company may not face smooth sailing ahead. But I reckon that is more than reflected in the current price.
If I had spare cash to invest now, I would be happy to add more to my portfolio.
