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Why I Don’t Think You Should Buy Vodafone Group plc

I usually find it amusing when politicians take an interest in business and in business practices. Indeed, the debacle surrounding alleged non-payment of tax by Starbucks, Google et al made me crack a smile.

On the one hand, the politicians had a point. Why should a company that operates in the UK and apparently engages in ‘transfer pricing’ get away with paying little or no tax? Surely the UK tax system has been around long enough and HMRC is wise enough to close such apparent loopholes?

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On the other hand, I chuckled because not only were various MPs becoming irate about something that seems to have been around for a long, long time, but they were coming up with all sorts of novel ideas. My favourite was a suggestion to tax companies based on their revenue instead of profits!

Anyway, discussion of ‘transfer pricing’ leads me on to an apparent settlement made between Vodafone (LSE: VOD) (NASDAQ: VOD.US) and HMRC. It relates to a ‘transfer pricing’ dispute concerning Vodafone’s Irish subsidiary, which was set up in 2001, whose raison d’etre was to collect royalties from across the globe, with the exception of the UK and Italy.

Although the size of the apparent settlement was not released by the company, it has been widely reported that the accounts of Vodafone Ireland Marketing, the subsidiary, show Vodafone reclaimed around €70 million of tax from the Irish government that was paid to HMRC as part of the settlement.

So, good news that it’s now been settled, although a sizeable fine is never good news for any company.

However, the news does not put me off buying shares in Vodafone. Such disputes and fines seem to be pretty standard fare for a multinational such as Vodafone.

What puts me off, though, is a business model that, to put it bluntly, is not particularly profitable. Certainly, Vodafone’s 45% stake in Verizon Wireless is performing well and generating substantial profits. However, the rest of the business seems to eat up a lot of capital and provide little in the way of returns.

Furthermore, tax issues in India and increasing competition in more mature markets such as the UK show that the future does not appear to be too bright for the company.

Trading on a price-to-earnings (P/E) ratio of 11.9 seems to indicate good value when the FTSE 100 is trading on a P/E of 15. However, this represents only a small discount to the telecommunications industry group, which has a P/E of 12.5, meaning Vodafone may not be as cheap as it first looks.

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> Peter does not own shares in Vodafone. The Motley Fool has recommended shares in Vodafone.

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