Vodafone (LSE: VOD) shares are a popular investment at the moment. Last week, for example, they topped Hargreaves Lansdown’s list of most bought shares.
Should I follow the crowd and buy shares in the telecoms giant for my own portfolio? Let’s discuss.
A beaten-up blue chip
I can see why UK investors are drawn to Vodafone at present.
For starters, the stock has taken a substantial hit recently. Over a one-year time horizon, it’s down about 35%. Over a two-year horizon, it has fallen about 51%.
That’s a big fall for a blue-chip, FTSE 100 company. When stocks experience declines of this magnitude, they can sometimes offer the potential for a big rebound.
Secondly, the trailing dividend yield is very high. Last financial year (ended 31 March 2023), Vodafone rewarded investors with total dividends of nine euro cents.
At today’s share price and exchange rate, that payout equates to a dividend yield of a huge 11.5%. That’s certainly an eye-catching yield.
A dividend cut on the way?
Digging deeper, however, the investment case for Vodafone is a little murky, to my mind.
Even after the big share price fall, the stock isn’t particularly cheap.
Yes, the forward-looking price-to-earnings (P/E) ratio of 10.7 is below the market average.
But this is a company with minimal growth right now (total revenue fell -2.3% year on year last quarter) and a huge pile of debt on its balance sheet (net debt stood at €36.2bn at 30 September).
So, I’d expect it to trade at a discount to the market.
It’s worth noting here that Citigroup just cut its target price for Vodafone to 68p from 78p. That new target is only one percent above the current share price.
Meanwhile, I think there’s a high probability that the dividend payout will be cut in the near future.
Currently, the consensus dividend forecast for the year ending 31 March 2024 is 8.4 euro cents while the consensus estimate for the following year is 6.9 euro cents.
I will point out that forecasts can be off the mark. Personally, I wouldn’t rule out a larger dividend cut given the big debt pile.
Finally, the share price downtrend is a bit of a concern. Without a positive catalyst, such as significantly better-than-expected results, this trend could continue. Trends can last longer than expected.
My move now
Putting this all together, I won’t be buying Vodafone shares for my portfolio in the near term.
I like to invest in companies that have solid growth in revenues and earnings, and strong balance sheets.
And right now, Vodafone falls short in these areas.
Of course, there is a chance that Vodafone shares could rebound from here. After all, CEO Margherita Della Valle is working hard to turn the company around.
All things considered though, I think there are better UK shares to buy for my portfolio today.
