Will the Vodafone share price keep falling?

The Vodafone share price has been on a steady decline for a number of years now, but is there a turnaround on the horizon? Gordon Best takes a look.

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Image source: Vodafone Group plc

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Vodafone (LSE:VOD), one of the world’s largest telecommunications companies, has seen its share price struggle in recent years. As of June 2024, the Vodafone share price sits at £0.72, representing a significant decline from its historical highs. Investors are rightfully questioning whether this downward trend will continue, or if the business presents a potential turnaround opportunity.

Let’s delve into the company’s financials and market position to assess its prospects.

The numbers

Vodafone’s market capitalisation stands at £19.2bn, reflecting the market’s tepid valuation of the company. The stock’s price-to-earnings (P/E) ratio of 18.8 times suggests it’s neither deeply undervalued nor overpriced compared to industry peers. However, the company’s price-to-sales (P/S) ratio of 0.6 times suggests that investors are paying relatively little for each pound of the company’s sales, which could signal an undervaluation.

Revenue for the last year reached £31.04bn, with earnings of £1.02bn. While these figures demonstrate Vodafone’s massive scale, the net profit margin of just 3.28% highlights the challenging nature of the telecommunications industry, where high infrastructure costs and fierce competition often compress margins.

Dividend

One of the firm’s most striking features is its high dividend yield of 10.62%. While this may appear attractive to income-focused investors, it’s essential to note that the payout ratio stands at a concerning 202%. This suggests that more is being paid in dividends than earnings, which is clearly unsustainable in the long term, and may signal future dividend cuts if profitability doesn’t improve.

Growth challenges

Analysts project earnings growth of 17.22% per year. This optimistic outlook could provide support for the stock price if realised. However, several risk factors warrant consideration.

Firstly, Vodafone’s debt-to-equity ratio of 80.1% indicates a significant debt burden, which could limit financial flexibility and increase balance sheet vulnerability to economic downturns. I’m also concerned about the company’s ability to cover interest payments with earnings is weak, adding to the financial risk profile. Finally, profit margins (3.3%) are substantially lower than last year (32.1%), indicating potential operational challenges or market pressures.

Performance

Over the past year, Vodafone’s stock has underperformed both its industry peers and the broader UK market. The stock is down 1.5% over 12 months, compared to a 6.2% gain for the UK wireless telecom industry and an 8.1% rise in the overall UK market.

On a positive note, the shares exhibit relatively low volatility, with an average weekly movement of 3.6%. This stability could appeal to risk-averse investors seeking steady returns.

Uncertain times ahead

While Vodafone’s share price has faced considerable challenges, the future is still uncertain for potential investors. The high dividend yield, though attractive, raises sustainability concerns. The company’s massive scale and potential for earnings growth offer reasons for optimism, but these are tempered by high debt levels and margin pressures. I’m not convinced a turnaround will happen any time soon, so I’ll be keeping clear.

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.

Gordon Best 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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