Since April, the Vodafone (LSE:VOD) share price has risen by around a third to 85p (at 9 October). Okay, nearly 40 FTSE 100 stocks have done better, but for shareholders like me, this is welcome news.
If it could break through the 100p-barrier by the end of the year, it would be a welcome Christmas present. After all, the last time the stock was above £1 was in March 2023.
A date for the diary
A key milestone could be 11 November. This is when the telecoms group announces its half-year results for the six months ended 30 September (H1 26).
Nearly a year ago, the group’s share price tanked 8.2% after it issued its H1 25 numbers. Investors were alarmed by a fall in service revenue in Germany, its biggest market. On 1 July 2024, a new law came into effect that meant it was no longer possible for landlords to invoice tenants for TV contracts as part of their rents. This remains a major challenge for the group.
This time round, I’m hoping for some signs that the group’s turnaround plan is working. Also, shareholders will probably receive an update on how the VodafoneThree business is performing following the merger in May. Good news and the share price could head north.
But a look at the average 12-month share price target of brokers makes me doubtful. The consensus is that Vodafone’s shares should be changing hands for around 8% less than they are today.
A wider issue
I suspect some of this pessimism reflects the fundamental problem of the telecoms industry. Namely, that there’s an ever-present requirement for substantial investment, yet — largely due to intense competition — the returns are lower than in other sectors.
To address this, Vodafone’s been selling off various assets and has exited Spain and Italy. A significant proportion of the sales proceeds has been used to reduce the group’s large debt burden. The balance has helped fund a share buyback programme.
With forecast FY26 earnings per share of 8.47 euro cents (7.35p), the stock currently trades on a modest 11.5 times expected earnings. For FY28, this drops to 7.7.
At 30 June, the group’s accounts disclosed a book value of €53.9bn (£46.8bn), which is much less than its current market cap of £20.2bn.
The group’s dividend is pretty good too. It’s likely to declare 4.5 euro cents (3.91p) for FY26. This means the stock’s currently yielding 4.6%. But shareholders are still smarting from the 50% cut in FY25, a reminder that payouts cannot always be be relied upon.
Final thoughts
To be honest, I find Vodafone frustrating. I’ve long believed (and still do) that the group’s current stock market valuation underestimates its true worth. I reckon its shares should trade comfortably above £1 but it will need a strong set of half-year results (and possibly an earnings upgrade) if it’s to get there over the next couple of months.
But even though the brokers appear to disagree with me, I’m not planning on selling up. I’m hoping that the half-year results will act as a catalyst and give the group’s share price renewed momentum. Hopefully, we will see something of a Santa Rally. Patient investors looking for an undervalued stock — that’s also paying an above-average dividend — could consider taking a position.
