Since the sale of its half of Verizon Wireless, Vodafone‘s (LSE: VOD) (NASDAQ: VOD.US) shares have slowly retreated from their post-consolidation price of 250p and now sit around 20% below that level.
The reason for this is simple: Vodafone is struggling to grow. The company is facing numerous headwinds, the most pressing being the threat from free online messaging services and the likes of Skype, which are eating into Vodafone’s traditional revenue streams of voice and text messaging.
Still, the company is trying to make a comeback through its expensive infrastructure project nicknamed ‘Project Spring’. This project will require a hefty capital outlay, around £19bn in fact, and is designed to make Vodafone one of the best mobile service providers within Europe. It remains to be seen if this hefty capital outlay will actually pay off.
Alongside online messaging services the company is also facing pressures from other integrated competitors, which offer services such as pay-tv, broadband and mobile packages. That said, Vodafone has made some acquisitions to boost its integrated offering, such as Ono, Spain’s largest cable operator but risks remain. For example, competitors such as BSkyB are beefing up their customer offering andconsolidating European operations to reduce costs, making it harder for Vodafone to compete.
Slow and steady
With competition increasing, the City is becoming increasingly concerned about Vodafone’s outlook and some analysts now believe that the company’s best days are behind it.
Indeed, now the company is no longer receiving a hefty dividend payout from Verizon Wireless, earnings per share are slated to fall 61%, to 6.8p next year. What’s more, current expectations are for earnings to expand only 4% to 7.1p per share during 2016.
Unfortunately, these forecasts put Vodafone on a lofty forward P/E of 28.3, falling to 27.2 during 2016. These valuations appear to be rather high for a company which is only expecting low single-digit earnings growth over the next few years.
Nevertheless, Vodafone’s dividend yield remains attractive. The company’s shares currently support a yield of 5.7%, which is slated to hit 5.9% next year, impressive when compared to the FTSE 100’s average dividend yield of 3.5%.
However, it remains to be seen if this payout is sustainable. In particular, as mentioned above, Vodafone is expected to earn 6.8p per share next year but the company’s dividend payout will cost 11.4p per share, indicating that the payout is not covered by earnings.
Then there is the issue of capital spending and debt repayments to consider. If Vodafone is spending heavily, the company may be forced to slash its payout in order to meet its debt restrictions.
Will it return?
Is it likely that Vodafone will return to its post-consolidation share price of 250p? Well, based on the company’s current outlook for growth it is unlikely. Specifically, if Vodafone’s shares were to return to 250p right now, the company would be trading at a forward P/E of around 37, a valuation more akin to a high growth tech company rather than slow and steady Vodafone.
That being said, for the time being Vodafone’s dividend yield remains attractive and if the yield were to fall in line with the FTSE 100 average, the company’s shares would surge above 300p. So, there may be hope for the shares yet but with growth stagnating shareholders could be in for a long wait.
