At one point it felt like Vodafone (LSE: VOD) shares might fall forever. They’d plunged into an inexorable decline since the glory growth days of the late 1990s dotcom boom. Only the dividend offered investors consolation. It was one of the most generous payouts on the FTSE 100 for years. Then reality caught up. The board cut shareholder payouts by 40% in 2019, froze them for five years, then slashed them by another 50% last year. That second cut almost came as a relief. Investors knew it was coming. The recovery was on.
Vodafone had become too big and sprawling. Debt piled up, growth stalled and key markets such as Germany, Italy and Spain struggled. Telecoms is a competitive market, spectrum auctions cost a fortune and regulation was tight. The constant need for restructuring distracted management. Yet it finally appears to be bearing fruit.
The turnaround takes hold
Vodafone is a leaner beast today, after selling off weaker divisions and sharpening its focus. That’s freed up cash to chip away at its debts and fund a €4bn share buyback. It was even able to increase the dividend in November, the first hike since 2018. That felt like it turning a corner.
The Vodafone share price has climbed 45% in the last year. Add in the trailing dividend yield of 3.6% and the total return climbs to 48.6%. A £15,000 investment a year ago would now be worth £22,290. That’s a total return of £7,290. This shows the impressive rewards that can be made from investing in beaten-down FTSE 100 recovery stocks. However, as Vodafone has shown, investors may have to be very patient on occasion.
Q3 results on 5 February were pretty solid. Revenue rose 6.5% to €10.5bn, while adjusted core earnings edged up 2.3% to €2.8bn. The board expects full-year earnings to land at the top end of forecasts, between €11.3bn and €11.6bn, alongside adjusted free cash flow of €2.4bn to €2.6bn. The recent integration of Three UK appears to be on track.
Yet the shares dipped on the day, as Vodafone continues to struggle in Germany, its biggest market. And now we have war in Iran, and fears of another cost-of-living crisis. A lot of consumer stocks in my portfolio have taken a beating. But maybe telecoms is different. Nobody is giving up their mobile phone these days. Although more of them might shop around for a cheaper supplier. The shares have slipped 6.5% in the last month. That’s modest compared to some.
Reasons for caution
Despite all that good news, risks remain. Net debt sits around €25bn, pushed up by the Three deal. Companies like Vodafone have to keep pouring cash into their networks. There’s little room for error if trading conditions worsen.
The price-to-earnings ratio has climbed with the shares and now stands at 15.9. So I wouldn’t call that cheap. Vodafone shares are worth considering with a long-term view. But with recent volatility throwing up so many bargains on the FTSE 100, I wouldn’t put it at the top of my buy list.
