Investing is cyclical, but the Vodafone (LSE: VOD) share price looked like an exception. For years it just fell and fell. Many investors stuck with the FTSE 100 telecoms giant for the dividend income, but I couldn’t see the appeal while the share price kept eroding their underlying capital.
Vodafone was weighed down by heavy debt, sluggish revenue growth and weak performance in key markets, especially Germany. Competition was fierce, regulation tight and pricing power limited. Its sprawling empire badly needed trimming back, with Spain and Italy dragging on results. The board seemed locked into endless restructuring, with little to show for it.
Income hero, growth zero
For a while the dividend yield topped 10%, making it one of the biggest payers on the FTSE 100, but that was clearly unsustainable. The last dividend increase came in 2018. It was then cut by 40% in 2019, frozen for five years, and slashed again by 50% last year.
At that point, I assumed Vodafone would drop out of the index and keep falling. After watching it closely for years, I stopped paying attention. Naturally, that’s when it took off. The shares are up 45% over the last year.
Add in the trailing dividend yield of 3.8% and the total return comes to 48.8%. A £10,000 investment a year ago would now be worth £14,888. That’s a dramatic turnaround by any measure.
FTSE 100 comeback kid
The change in fortunes reflects the impact of group chief executive Margherita Della Valle, who assumed the top job in April 2023. Under her leadership, Vodafone has sold its underperforming Spanish and Italian units, and moved forward with a major merger of its UK business with Three. German revenues have begun to return to growth after years of declines.
The slimmer group has freed up cash, allowing Vodafone to reduce debt and launch a €4bn share buyback programme. It’s also reinstated a progressive dividend policy after years of disappointment.
First-half results on 10 November showed revenue up 7.3% to €19.6bn. Management now expects to deliver results at the top end of its 2026 guidance, with underlying free cash flow of between €2.4bn and €2.6bn.
Solid valuation
Despite the strong run, Vodafone’s valuation doesn’t look stretched. The price-to-earnings ratio stands at 14.7, with a forecast P/E of around 12. The forward yield for 2026 is pencilled in at 4.18%.
Even so, I’m cautius. Net debt actually rose in the six months to November, up more than 15% to €25.9bn, driven by the Three merger. Telecoms remains a capital-hungry, competitive industry, where companies must pump huge sums of cash into building fibre networks and the 5G spectrum. Also, recent progress in Germany may be hard to sustain but the investment remains huge. Africa may offer an exciting growth opportunity though.
The shares are still down around 20% over five years, so further recovery is possible. Investors might consider buying, but my gut feeling is that Vodafone still has something to prove.
