Looking at how Vodafone (LSE: VOD) has performed in recent years on the stock market, it can be difficult to get too excited. The Vodafone share price is up just 3% over the past year. Across five years, it has lost 49% of its value.
That does not tell the full story when it comes to total return though.
While the share has performed poorly, the telecoms giant has been a generous dividend payer. Even after halving its dividend per share this year, Vodafone still offers a prospective yield of 5.5% at its current price.
The compelling growth story is long gone
That dividend cut is a bit of a red flag to me. It was a savage cut, after the dividend had been held flat for a number of years, following another big cut.
In other words, the share’s financial performance has been going in the wrong direction compared to what I look for as an investor.
Meanwhile, Vodafone has been selling off bits of the business. While that can be positive in the short term as it boosts cash and can help pay down debt, it also makes it harder to sustain profit levels in future.
Both revenue and post-tax profit at the company fell last year.
I still see telecoms as an area of growth. But Vodafone has been moving in the opposite direction, by slimming down.
In itself though, that does not necessarily make the company less attractive to me. Debt reduction has helped its balance sheet and focusing in markets where it has a strong position could turn out to be a smart strategic choice over the long term.
I see some possible value here
Indeed, Vodafone’s business performance lately has been solid in my view.
This year it expects to generate at least €2.4bn of free cash flow. So the current share price means Vodafone’s market capitalisation is less than 9 times its anticipated free cash flow for the year.
Asset sales helped the firm cut net debt to €31.8bn at the halfway point of its current financial year. That is still substantially higher than I would like to see, but it is a move in the right direction.
The dividend cut also takes some of the pressure off the company’s finances. It has also been using some spare cash to buy back its own shares.
Meanwhile, the company has a huge customer base and a strong brand in many European and African markets. Demand for mobile telephony and data services will likely remain high and mobile money is a growth driver, notably in some African markets.
Still, Vodafone has disappointed shareholders in recent years (including me before I sold my holding). While the business does seem to be putting itself on a firmer long-term footing, the balance sheet still strikes me as a risk given the debt level.
Although the current Vodafone share price could turn out to be a bargain, I also do not see any obvious drivers to push it upwards at the moment. For now, I have no plans to invest.
