Vodafone (LSE: VOD) shares are finally doing something they haven’t done for years, decades even. They’re actually climbing.
Yes, I’m amazed too. I wrote them off yonks ago. After spiking to 527p during the final stages of the dotcom bubble in March 2000, the only way has been down. Despite the recent recovery, they trade at just 74.4p today.
When I last looked at the FTSE 100 stock for the Fool, on 17 March, I grimly noted that the “Vodafone share price has been falling for as long as I’ve been buying shares”. It was cheap, trading at 7.1 times earnings, while yielding a blockbuster 10.4%. Yet I still wasn’t tempted.
FTSE 100 struggler
While I accepted that Vodafone would probably recover at some point, it still had too many challenges to tempt me.
So naturally, it did recover. The catalyst was an odd one. Everyone knew the dividend was living on borrowed time and would be cut in half. When the bad news was finally confirmed on 14 May, it was greeted with relief.
Vodafone’s full-year 2023 results delivered some good news, too. While operating profits dropped 74.6% to €3.7bn, this was largely because 2022 saw some lucrative disposals, with Vantage Towers netting €8.6bn.
Vodafone is selling its Italian and Spanish operations for €13bn, and these were also excluded from the numbers.
With modest 2.2% organic growth and slightly-better-than-expected free cash flow of €2.6bn, investors chose to look on the bright side. They also welcomed the €2bn share buyback funded by the Spanish disposal, plus a potential €2bn when the sale of Vodafone Italy is confirmed.
Vodafone shares are now up 14.57% over the last three months, although they’re still down 7.75% over one year and 40% over five. Margherita Della Valle is showing progress on her turnaround plan, but without that fabulous double-digit yield is it still worth tagging along for the ride?
Still decent income
The dividend cut comes into force in 2025, cutting payouts from 9 cents a share to 4.5 cents. The yield will drop, but not as much as I feared. Markets are forecasting 7.1% a year. That’s still one of the highest on the index.
But how long will it hold? This isn’t its first big dividend cut. Vodafone slashed shareholder payouts by 40% in May 2019, in a bid to bolster its balance sheet. If the share price continues to slide and the yield creeps up, we can’t rule out another chop further down the line.
There’s a chance Vodafone has finally hit peak retrenchment, and can rebuild from its new lower base. It’s taken a quarter of a century to get there.
Vodafone has exited low-margin territories and is growing nicely in the UK and Africa. However, revenues in the profitable German market were disappointingly flat in 2023, despite rising inflation. The stock looks decent value, trading at 10.9 times forward earnings. But then I remember that it has net debt of €33.2bn and reach for my bargepole.
Vodafone has plenty of fans, but I don’t think they’ve been rewarded for their loyalty. The worst may be over but I’m not convinced its best is worth investing in.
