Amid the tech stock sell-off that’s hitting the US, it’s nice to see the Vodafone (LSE: VOD) share price fall just a couple of percent after Q1 growth slowed.
The telecoms giant told us on Thursday (25 July) that service revenue in Germany fell, mainly due to a change in TV regulations. But even without that effect, it still dipped 0.3%.
Overall though, we saw organic service revenue rise 5.4%, with total reported revenue up 2.8%.
Transformation
CEO Margherita Della Valle said: “Our performance in the first quarter is consistent with our full year guidance, which we reiterate today.”
Right now, we’re in early days of Della Valle’s shakeup for Vodafone. Back at FY results time 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.“
So far, it looks like that’s paying off, as this new update spoke of continuing strong growth in Turkey and Africa.
Valuation
What does this all mean for Vodafone’s valuation, and should we buy now?
This looks like a gem for dividend investors, at least on first glance. The forecast dividend yield for the current year stands at 10.9%, the highest in the FTSE 100.
But as part of the new boss’s plans for the firm, that’s set to be slashed by half next year. Still, forecasters already expect it to start growing again from that new level.
It looks like it’s going to be well covered by earnings too, and that covers one of my previous worries. With the cost of rolling out networks, I just couldn’t see how the old uncovered dividends were sustainable. I got that bit right, at least.
On dividends then, it looks like Vodafone might be one that long-term income investors should consider.
A value trap?
But, looking at the risky side of the equation, I feel a few shivers.
We didn’t get any details of the company’s debt in this Q1 update. But at FY time, net debt stood at an eye-watering €33.2bn (£30bn). And Vodafone’s total market-cap’s only £18.3bn. Gulp!
The shares are currently priced at around 9.5 times forecast earnings for the current year, and I’d snap some up at that valuation in the absence of debt.
But if I adjust for the net debt, I get an effective price-to-earnings (P/E) multiple of around 25. That might still be fair value if Vodafone’s in for years of strong growth. But I’d rate forecasts on that front as only modestly upbeat.
Buy, or not?
On the one hand, I like the new well-covered dividend prospects. But I really don’t like the debt situation. Still, others like BT Group look set to keep delivering the cash despite also having large debts. But then, any pressure on cash flow could mean further dividend cuts.
Do I sound confilcted on Vodafone? I am. I’ll hold off for now.
