The Vodafone (LSE: VOD) share price has been struggling of late. Shares in the telecommunications giant have fallen 5.6% to 75.5p over the last 12 months while the FTSE 100 has managed to gain 8.3% in the same period.
Recently I’ve been scouring the UK large-cap index for a bargain buy. With signs of some green shoots and a share price under pressure, it got me wondering if the telco with a £19.8bn market cap was a bargain hiding in plain sight.
Earnings and dividend
Let’s start with revenue and earnings. Vodafone posted £36.7bn of revenues and £11bn of adjusted earnings before interest, tax, depreciation and amortisation after leases (EBITDAaL) in FY24.
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Chief Executive Margherita Della Valle knows there’s work to do to turn the company around. She took the reins in early 2023 with a big job on her hands. Boosting the lacklustre return on capital employed (ROCE) figure is a key focus for her and the company moving forward.
Vodafone’s adjusted free cash flow fell from £4.1bn to £2.6bn in FY24 while total dividends were steady at 9 cents per share.
While Vodafone has a 10.1% dividend yield right now, I’m wary of the dividend trap. The board has flagged a rebased 4.5 cents total dividend in 2025 following the right-sizing of the portfolio. Recent UBS forecasts put the forward dividend yield at around 5.5%, partly offset by €4bn (£3.4bn) worth of share buybacks.
Balance sheet
Della Valle has been on a mission to right the ship since her appointment. Asset sales, simplifying operations and seeking sustainable growth are also top of her agenda.
Net debt has remained steady at £33.2bn, which implies nearly three times leverage against the group’s EBITDAaL figure. Peer BT Group has £19.5bn of net debt against adjusted EBITDA of £8.1bn, so I think there’s still some work to do for Vodafone in the years to come.
The company does have €9.4bn (£7.8bn) of short-term cash and liquidity while also showing an ability to generate cash in FY24.
Valuation
Vodafone’s adjusted basic earnings per share fell from 11.3 cents to 7.5 cents in the latest year. That’s part of the plan to simplify and downsize the broader group including the sales of Vodafone Spain and Vodafone Italy.
The stock has a price-to-earnings (P/E) ratio of 23.2. That makes the Vodafone share price look a touch expensive against both the Footsie and BT, which have P/E ratios of 19.9 and 17.8, respectively.
The verdict
While there are signs of the turnaround strategy working, I think it’s too early to for me buy in. The relative value against the market and peers means the Vodafone share price looks a bit rich right now.
I don’t like rolling the dice on big promises. Once we see a steady state business that has been right-sized for the future I’ll be taking another look.
That said, if Della Valle and her team can pull off this turnaround, Vodafone could be one that comes back in vogue for those seeking some telecoms exposure in their portfolios.
For now, I think there are other opportunities for me that have stronger balance sheets and better earnings outlooks than Vodafone.
