Choosing which FTSE 100 stocks to buy can be difficult. Many of them are household names and are major players in their individual markets. Generally speaking, their balance sheet strength means they are less likely to deliver earnings surprises. This should help ensure greater share price stability. And a lot of them pay generous dividends, which makes them attractive to income investors.
To sort the best from the rest — and to identify which offer the best value for money — many investors employ popular valuation techniques. I’ve been applying some of these to Vodafone (LSE:VOD) to see if the stock’s worth buying for my portfolio.
Crunching the numbers
With the words of Mark Twain ringing in my ears, it’s important to remember there are lies, damned lies, and statistics.
The 10.4% dividend yield for Vodafone — the highest on the FTSE 100 — is based on its payouts over the past 12 months. In March, the company announced a 50% cut. It’s therefore presently (29 November) yielding a more modest 5.2%. However, this is comfortably above the average for the index of 3.8%. Of course, dividends are never guaranteed.
In contrast, it’s fair to say that Vodafone’s price-to-book (P/B) ratio of 0.37 is the lowest (excluding those that have net liabilities) of all FTSE 100 members. At 30 September 2024, its balance sheet was disclosing equity (assets less liabilities) of €60.6bn (£50.4bn). With a current stock market valuation of £18.5bn, if the company ceased trading today — and it sold all of its assets and cleared its liabilities — there’d be £31.9bn of cash left over to return to shareholders. That’s a 172% premium to its current share price.
Looking at earnings, the stock has a price-to-earnings (P/E) ratio of 9.9, comfortably below the index average of around 14.5. But whether this is a good indication of value for money is relative. Different sectors attract different earnings multiples and these can fluctuate over time as industries fall in and out of favour. However, it’s lower than BT’s, its nearest rival in the FTSE 100. And it’s comfortably below the average of 202 European telecoms stocks (14.1).
So should I buy?
My verdict
I’m already a shareholder but, of course, this doesn’t mean I can’t include more of the stock in my ISA. Indeed, given that I’m sitting on a paper loss, it’d help reduce my average cost price. And hopefully, I’d break even quicker.
But I don’t want to buy any more, even though — on paper at least — the stock appears to be something of a bargain.
Although I think the company’s current turnaround plan will deliver results, it looks as though it’s going to take a while. Revenue in Germany — the telecoms giant’s largest market — is still falling. And it’s still unclear how the company’s merger with Three (which now looks likely to be given regulatory approval) is going to impact on the group’s financial performance. Its relatively high borrowings are also a cause for concern.
For these reasons, I think there are better opportunities for my investment cash elsewhere.
