Vodafone’s (LSE: VOD) share price has more than halved in the past five years.
Part of this came from big shocks to the financial markets over the period, including Covid and rising inflation and interest rates. The rest can be attributed to a lacklustre performance by the company during that time.
However, such a huge fall in price raises the question to me of whether the stock is now an equally huge bargain.
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Relative stock valuation
My starting point in answering this is to look at how it rates on one of the key stock measurements I use.
On the price-to-book ratio, Vodafone currently trades at just 0.4 – bottom of its group of competitors by a long way. More specifically, Orange is at 0.9, BT Group at 1.1, Deutsche Telekom at 2.3, and Telenor at 2.8.
So it is very cheap on this measure.
To translate this into cash terms, I used a discounted cash flow analysis using other analysts’ figures and my own. This shows the Vodafone shares at 74p to be a stunning 71% undervalued.
Therefore, the ‘fair’ value would be £2.55 a share. Given the vagaries of the market, it might go lower or higher than that. But it underlines how enormously undervalued the stock appears.
What are the firm’s growth prospects?
Ultimately, a firm’s share price and dividend are driven by it growing earnings in the years ahead.
In 2023, then-new CEO Margherita Della Valle set out her plans to transform Vodafone. These revolved around simplifying the business, improving customer focus and investing in high-margin areas.
One year on and its full-year 2024 results of 14 May showed growth in all its markets across Europe and Africa. Organic service revenue growth was 6.3% year on year.
Q1 of its new fiscal year 2025 showed total service revenue up 5.4% over the same period last year. And operating profit jumped 42.9% to €1.5bn.
A key risk for Vodafone is that this reorganisation falters at some point. The new 10-year $1bn deal with Google announced on 8 October may be another risk. It could clash with the 10-year, $1.5bn partnership Vodafone launched with Microsoft in January if not managed carefully.
That said, as it stands, consensus analysts’ estimates are that its earnings will grow by 22% each year to end-2027.
The huge dividend yield bonus
Last year, Vodafone paid a dividend of 9 euro cents (fixed at 7.6p). On the current share price of 74p, this generates a stellar yield of 10.3%.
This is one of the highest returns in any FTSE index, with the FTSE 100 averaging 3.5% currently and the FTSE 250 at 3.3%.
£10,000 invested in the stock at this rate – with the dividends compounded – would make £17,888 over 10 years. After 30 years on the same basis, it would have made £206,892 in dividend returns.
That said, for full-year 2024 to 31 March, the firm plans to cut the dividend in half before aiming to increase it again over time.
I already have several high-yield stocks and am very happy with the prices I paid for them. If I did not have these, though, I would buy Vodafone today for its good yield, extreme undervaluation and excellent growth prospects.
