The Vodafone (LSE: VOD) share price has fallen again, and it’s down 55% in the past five years.
That’s despite the telecoms giant’s transformation plan. And a €500m share buyback announced on 14 November hasn’t given Vodafone shares the kick I thought it might. At least, not yet.
What needs to happen for the share price to start climbing again?
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Path to growth
Let’s remind ourselves what the company’s new focus is all about:
We will simplify our organisation, cutting out complexity to regain our competitiveness. We will reallocate resources to deliver the quality service our customers expect and drive further growth from the unique position of Vodafone Business. — CEO Margherita Della Valle, May 2023
That includes cutting the dividend in half. And I wonder if that might be sending mixed messages.
The cash isn’t there to keep paying those previous big dividends. But suddenly there’s enough spare to splash out €500m on buying back shares?
Good sense
I can see why investors might be confused. But I think it’s a sensible move.
I like the companies I part-own to pay progressive dividends supported by earnings cover, which Vodafone’s weren’t. And then to pay out spare cash as buybacks, which can help avoid setting up dividend expectations that earnings just can’t support.
Maybe fears of further dividend cuts are also helping to hold back the price.
It’s happened before, where a company’s first-stage cost-cutting wasn’t enough and the pruning shears came out again.
Outlook
Even with the cut, there’s still a 6.7% dividend yield on the cards. And when I look at dividend forecasts and at predicted cover by earnings, I like what I see.
Analysts expect the dividend to remain flat until at least 2027, which seems fair enough to me. And with earnings per share (EPS) predicted to grow, we could see the dividend covered 1.6 times this year, rising to 2.1 times by 2027.
The problem is, I suspect many investors will want to see some actual earnings growth before they’ll believe that the new dividend plan will work. That includes me.
Earnings on track?
It’s hard to read much into H1 results this year, as we’re comparing with a reported loss per share in the first half last year. Vodafone rated its adjusted EPS figure as 30% ahead.
That’s a good start, but we might need to wait until FY results in May 2025 to get a proper handle on the recovery. A Q3 update in February could provide hints though.
So what about the share price? Brokers have an average target of 91p on the shares, up just 28% from the price at the time of writing. That level could mean a price-to-earnings ratio of only 9 based on 2027 forecasts.
One for dividend investors?
Right now, I think Vodafone should be of most interest to income investors and is worth keeping an eye one. It’s on my watchlist for sustainable dividend candidates for sure.
I just don’t yet know if the recovery plan’s words will turn into cash.
