The market has not been kind to Vodafone (LSE: VOD) (NASDAQ: VOD.US) during the past six months. Indeed, since the beginning of the year Vodafone’s shares have lost more than 20%, excluding dividends.
Unfortunately, it would appear that Vodafone’s performance is only going to get worse.
Declining income
It’s no secret that Vodafone is struggling. The company revealed earlier this year that during the space of the last 18 months, underlying revenue had collapsed 18% within Europe and 4.3% overall.
Declines were especially bad within Italy, Spain and southern European markets where revenue fell 17.6%, 10.6% and 13.6% respectively. Additionally, Vodafone was forced to take impairment charges totalling £6.6bn on assets across Europe.
Luckily, Vodafone’s rapidly expanding presence within emerging markets soften the blow. Revenue within India and Turkey expanded 13.2% and 3.9% over the period. But the City expects things to get even worse for Vodafone. The average analyst estimate is predicting a staggering 61% year on year decline in the company’s earnings per share this year.
Valuation worrying
With earnings per share forecast to fall 61%, to 6.8p for this year, Vodafone now looks expensive compared to its historic valuation. Specifically, during the past five years Vodafone has traded at an average P/E multiple of 11. However, at present levels the company is trading at a forward P/E of 28, more than double its historic average.
If a multiple of 11 times is applied to Vodafone’s estimated earnings per share of 6.8p for this year, it is reasonable to believe that Vodafone’s shares are worth in the region of 75p each. Still, the company’s earnings are expected to hit 7.2p per share for 2015, implying a slightly higher price of 80p.
There is the dividend
Of course, Vodafone’s heft dividend payout remains attractive. City figures suggest that Vodafone’s dividend payout will amount to 11.4p per share this year, a yield at current prices of 5.8%. While this dividend remains in place, it is unlikely that Vodafone’s shares will fall to 75p as this would imply a dividend yield of 15.2%!
Nevertheless, there is reason to believe that Vodafone’s dividend payout is under threat. Indeed, the current payout of 11.4p per share is not covered by earnings per share and Vodafone could be heading towards a cash flow crisis.
Cash flow crisis
In an attempt to return to growth, Vodafone has unleashed its big bazooka, a £19bn infrastructure upgrade programme entitled ‘Project Spring’.
However, the City is worried about this hefty capital outlay. Moreover, credit ratings agency Moody’s has already hit out at Vodafone, stating that it could have its credit rating downgraded the company does not strengthen its balance sheet. A downgrade would be disastrous for Vodafone and it may force the company to cut its dividend payout in order to conserve cash.
The bottom line
There is no way to sugar-coat it: Vodafone is struggling, it’s as simple as that.
Only time will tell if the company’s ‘Project Spring’ will help boost earnings and enable the company to fully cover its dividend payout. The project is a big multi-billion pound gamble, and things could get even worse for Vodafone if this spending does not pay off.
