What’s going on with the Vodafone share price? It now pays a 12% yield!

Vodafone share price action is baffling investors left, right and centre. So is it a possible turnaround winner, or a portfolio stinker?

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The Vodafone (LSE:VOD) share price is a head-scratcher, for sure. At its current level around 63p, the FTSE 100 shares are paying a whopping 12% dividend yield.

And a 55% share price crash over the last five years means the company is trading on a price to earnings (P/E) ratio of less than 4.2.

My colleague from The Motley Fool, James Beard, wrote recently on Vodafone’s rivals. He said the two largest telecoms providers in Europe — Deutsche Telekom and Swisscom — trade on P/E ratios of 12 and 14.9.

Butt buying beaten-down companies at bargain prices and compounding the gains over many years is a proven investing strategy. So is now the perfect time to buy Vodafone?

Turnaround potential

It has seen a huge uptick in share trading in 2024. It’s possible investors see its 60p-65p mark as a good buy-in point.

The company has produced consistent sales of between £35bn and £40bn a year between 2018 and today.

But profits? That’s a different story.

In 2018 it made £2bn. Then a £6.8bn loss in 2019. Followed by a £785m loss in 2020, a £59m profit in 2020 and, get this, an £11bn profit in 2021.

Projections suggest around £1.7bn of profit next year, and £2bn by 2025.

Bad news bears

But a slew of negative headlines had turned some investors away from the company. These include:

  • A monopoly probe into its merger with mobile phone provider Three
  • The Emirates-backed stake in its shares posing a national security risk
  • Spending £800m over the last two decades on consultants

And a heavy debt load now approaching £42bn means the market has been downbeat on Vodafone.

This could lead the FTSE 100 company to cut its dividend from 8.9p per share to 6.9p by 2025. That’s according to leading City analysts.

And the company has been engaged in selling off the assets it picked up during its empire-building phase. This inconsistent strategy smacks of poor management.

Kicked out

Could it get kicked out of the FTSE 100? That would be disastrous for Vodafone and its shareholders.

At around 63p, Vodafone’s market cap is £17bn. Only the highest-valued 100 companies in the UK can be in the FTSE 100. If they lose market value, the businesses at the lower end are pushed out of the index.

In general when companies are promoted to the FTSE 100 they see an uplift in prices. The main reason is that a lot of large funds have to buy the newly-added shares.

And the opposite — heavy selling — tends to happen when stocks exit the FTSE 100.

To approach the lower end of the list, around £3.5bn, Vodafone’s share price would have to fall to 13p.

From today’s share price, that would be another drop of around 80%. It’s unlikely, but not impossible.

Will I buy?

Even at bargain prices, I won’t be touching Vodafone just yet. There’s just too much risk sloshing around.

And I need a little more certainty to ensure I’d be buying a company that’s actually on the verge of a turnaround.

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.

Tom Rodgers has no position in any of the shares mentioned. The Motley Fool UK has recommended 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.

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