Vodafone’s (LSE: VOD) share price has struggled over the past year. I think much of this has resulted from market uncertainty over the merger of Vodafone UK with Three UK.
The UK’s Competition and Markets Authority formally approved it on 5 December. However, its official completion was only on 31 May. Vodafone holds 51% of the newly-named VodafoneThree, while the remainder’s held by CK Hutchison Group Telecom Holdings Limited.
New investments and cost savings
The two companies announced on 2 June they’ll invest £1.3bn in VodafoneThree’s network in the first year. The intention is to take the market leadership position in the UK away from EE and O2. BT owns the former, and Telefonica and Liberty Global own the latter.
They’ll also invest £11bn over the next 10 years to create Europe’s most advanced 5G network, starting with this initial investment.
The parent companies expect the combined VodafoneThree business to deliver cost and capital expenditure synergies of £700m after five years.
The key risk here is any major mishandling in this process of combining the two’s UK operations. This could negate much of these forecast synergies and be value destructive. That said, consensus analysts’ estimates are that Vodafone’s earnings will increase by a spectacular 59.3% a year to end-2027.
Are the shares undervalued?
The key element of my assessment of any firm’s stock price is to run a discounted cash flow (DCF) analysis. This shows where any firm’s stock price should be, centred around cash flow forecasts for the underlying business.
Using other analysts’ figures and my own, the DCF for Vodafone shows it’s 44% undervalued at 73p. Therefore, the fair value of its shares is £1.30.
Consequently, all things being equal, I think the stock price could soar as it converges with its fair value over time.
Will I buy the shares?
Even before the merger, which I see as very promising, the firm looked solid to me. Its 2025 results released on 20 May showed reported revenue rise 2% year on year to €37.4bn (£31.48bn). Service revenue increased 2.8% to €30.8bn.
That said, two key factors prevent me from buying the stock. The first is that I’m aged over 50 and focused on shares that deliver dividend yields over 7%. Its full-year 2025 dividend was 5 euro cents (4.3p), which gives a current yield of 5.7%. This is still better than the FTSE 100 average of 3.5% but doesn’t meet my requirement.
The second reason is the sub-£1 share price, which creates a considerable price volatility risk, in my view. More specifically, at the current 75p price, each one-penny move represents 1.3% of the stock’s entire value! This is way too risky for me at my point in the investment cycle.
That said, I think it’s well worth the consideration of investors who view these factors as less important.
