Vodafone (LSE: VOD) shares have performed well recently. Year to date, they’re up about 25%. Zooming out however, they haven’t been a great long-term investment. Here’s a look at how much a £10,000 investment in the FTSE 100 telecoms company five years ago would be worth today.
Five-year performance analysed
Vodafone shares were a more popular investment five years ago than today, because the share price was down and the stock was offering an attractive dividend yield of around 7%.
At the time though, the company’s fundamentals were quite shaky as capital expenditures and debt were high and dividend coverage (the ratio of earnings to dividends) was low. So, buying the stock was relatively risky. These weak fundamentals, and the high level of risk, are reflected in the performance of the shares.
Five years ago, they were trading for around 117p. Today however, they’re trading at 86p, so anyone who invested £10,000 in Vodafone five years ago would now be sitting on shares worth about £7,350.
What about dividend income though? Would this have offset the share price losses? Well, I calculate that £10,000 invested in the company, they would have picked up about £3,600 worth of dividends. Add that to the £7,350 and the total investment would be worth about £10,950 (assuming dividends weren’t reinvested).
That’s obviously a positive return. However, it only translates to a return of about 1.8% per year over the five-year period. That’s quite disappointing. For the five-year period to the end of July, the FTSE 100 index returned 13.2% a year.
A high yield can backfire
This is a good illustration of why it’s not smart to buy a stock just because it has a high yield. Even with an attractive yield, a stock can still generate disappointing returns.
Before buying a stock, it’s important to think holistically and analyse things like the company’s growth potential, financial strength, level of profitability, and dividend coverage (Vodafone cut its dividend again last financial year). By looking at the fundamentals, an investor can potentially improve their chance of success in the stock market.
Has the outlook improved?
Do Vodafone’s fundamentals look any better today? I think they do. Recently, revenue growth has started to pick up a little bit. For example, in a recent trading update for Q1, group revenue increased by 3.9% to €9.4 billion with strong service revenue growth.
Meanwhile, analysts expect the company’s earnings per share to rise as the company boosts efficiency. Next financial year, earnings growth of about 15% is anticipated. Dividend coverage is also much healthier than it was at 1.6 times. This indicates that payout is most likely sustainable in the near term (the yield is about 5.1% today).
It’s worth pointing out that while debt has come down lately, it’s still a little high (which adds risk). At the end of March, net debt was €22.4 billion.
The valuation is also starting to look a little full. Currently, the price-to-earnings (P/E) ratio is about 12.
Given the debt and valuation, I won’t be rushing out to buy Vodafone shares. They could be worth considering for income however, to my mind, there are better stocks out there today.
