For years, I’ve seen what I thought were two main drags on the Vodafone (LSE: VOD) share price.
The company looked like a ragged collection of mobile operators, without much joined-up synergy.
And the dividend was too high, without earnings cover. Some investors were happy to take the 10% or so on offer. But the share price suffered badly.
Value trap
A high dividend can look good. But it can be a value trap if it leads to capital losses at the same time.
And it so often ends in pain. Cash flow reality hits home, and the board caves in and cuts the dividend.
That’s happened here, with plans to refocus. So both of the things I thought needed to happen are happening.
Does it mean the share price could be set to head on up now? I think it just might.
New direction
It’s all part of CEO Margherita Della Valle’s shake-up of the firm.
With FY24 results, she said: “A year ago, I set out my plans to transform Vodafone, including the need to right-size Europe for growth. Since then, we have announced a series of transactions and we are now delivering growth in all of our markets across Europe and Africa.”
From 2025, the dividend will cut by half. It will be “set at a sustainable level, which ensures appropriate cash flow cover.” And there’s still “an ambition to grow it over time.”
Even with a cut, we’re still looking at a forecast dividend yield of 5%. And for a stock with solid growth plans, that’s fine.
New forecasts
Forecasts show a price-to-earnings (P/E) ratio of less than 10 by 2026. It sounds low, but I’d be a bit wary of it right now.
It could be a while before we can put any realistic thoughts together, until we see how the new Vodafone will shape up after its disposals.
Operations in Ghana and Hungary are already gone. And the Spanish and Italian divisions are under sale agreements.
A focus on higher-margin developed markets should help boost the return on equity (ROE). And that’s been a key weakness. Forecasts already see ROE rising. But again, I think it’s still too early to guess at the full extent.
Patience still needed
Vodafone’s refocus could need a fair bit of time. It makes me think of Aviva, which also went through a drive to slim down and boost efficiency. That’s working, but it’s still not all done.
The main risks I see are that we can’t be sure the plan will work, and high debts could still keep investors away. Plus that huge dividend sweetener is going.
I’ve no idea how to put any kind of target share price on Vodafone right now. But despite the unknowns and the risk, I reckon the company is on the right path.
I see a good chance that, over the next five years, we could see a reversal of the past five years of falls.
