Is Vodafone Group plc Still A Buy After The 2013 FTSE Bull Run?

2013 has been the year in which even the most hardened stock market bears have admitted that we’re in a five-year bull market — and it’s not over yet.

Although the FTSE 100 has slipped back from the five-year high of 6,875 it reached in May, it is still up 8.8% this year, and is 53% higher than it was five years ago. As Christmas approaches, I’ve been asking whether popular stocks like Vodafone Group (LSE: VOD) (NASDAQ: VOD.US) still offer good value, after five years of market gains.

Back to basics

Vodafone’s share price has risen by 46% so far this year, mainly thanks to its $130bn deal to sell its 45% interest in Verizon Wireless to Verizon Communications. Shareholders will receive a mixture of cash and Verizon shares worth around 112p, and Vodafone has also promised to increase its full-year dividend by 8% to 11p.

Since the deal, Vodafone’s share price has been given further momentum by rumours suggesting that that US giant AT&T could buy Vodafone, once the Verizon deal has completed.

However, billionaire investor Warren Buffett says that one of the most important lessons he learned from value investing pioneer Ben Graham, is that “price is what you pay, value is what you get”.

As potential buyers of Vodafone today, we need to consider whether the mobile operator’s share price currently represents good value, without relying on a takeover deal to provide a one-off gain.

Ratio Value
Trailing twelve month P/E 15.0
Trailing dividend yield 4.5%
Operating margin 11.5%
Net gearing 28.5%
Price to book ratio 1.3

The figures above suggest that Vodafone is fairly priced, but certainly not cheap, given that its southern European businesses are currently struggling against very difficult economic conditions.

2014: All change at Vodafone

It’s very hard to predict how Vodafone’s business will change after the Verizon Wireless sale completes. Vodafone is planning to keep around $35bn of cash from the sale, which it will be able to use to cut debt, invest in network upgrades and spend on acquisitions, but there is no guarantee this approach will be successful.

Vodafone’s financial year ends in March, and consensus forecasts currently suggest adjusted earnings of 13.7p per share for the current year, which gives a fairly strong valuation:

Metric Value
Forecast P/E (2013/14 adj. earnings) 16.9
Forecast yield (2013/14 dividend) 4.8%
Forecast earnings growth (2013/14) -12.4%

As a shareholder, I think that an AT&T bid is quite likely, but if this fails to happen, I expect Vodafone’s share price to underperform the market next year and possibly beyond, until the company demonstrates that it is generating profitable new growth.

Vodafone for income?

Vodafone has been a dividend favourite for some years, but should income investors be paying more attention to the UK's other telecoms giant, BT?

The Motley Fool's telecoms experts have produced a new report, "The Motley Fool Guide To Investing In Telecoms", which compares BT Group and Vodafone on nine key measures. You may be surprised by the results -- I was, especially when I saw that BT's operating margin is 37% higher than Vodafone's.

For full details of how BT and Vodafone stack up, click here to download your free copy of this report immediately.

> Roland owns shares in Vodafone but not in any of the other companies mentioned in this article. The Motley Fool has recommended Vodafone.