Last year, shares in FTSE 100 income champion Vodafone (LSE: VOD) slumped 29.2%. The stock has continued to decline this year, falling 12.2% year-to-date.
Is easy to see why investors might be attracted to the business after these declines. The stock is now trading at its lowest level since 2009, and the company’s dividend yield has spiked up to 8.7%, giving it one of the highest yields in the FTSE 100. However, looking past the dividend yield, the Vodafone share price seems to be on shaky ground.
Today, I’m going to explain why I’m not a buyer of the shares after recent declines, and why I think the stock could fall a lot further in the medium term.
The first thing I think when I look at Vodafone is the stock looks cheap, but this is a bit of a misleading statement. The Vodafone share price seems cheap compared to its historical chart, although if you look past the chart and concentrate on the fundamentals, shares in the company stop being cheap and actually look expensive.
Based on the City’s current figures, the Vodafone share price is currently trading at a forward P/E of 18.4. Earnings per share are expected to jump 21% in 2020, putting the stock on a multiple of 15.2 times earnings for 2020.
Vodafone’s only real public competitor here in the UK is BT, which is currently trading at a forward P/E of just under 9, implying Vodafone is overvalued by nearly 70% based on earnings expectations for 2019. The group’s US peer, Verizon might be a better comparison. Its shares are currently trading at a forward P/E of 12.3. AT&T, another US-listed telecommunications giant, is dealing at 8.4 times forward earnings.
Based on these comparisons, I don’t think it’s unreasonable to say that shares in Vodafone are overvalued at current levels. Taking into account the valuations of its domestic and international peers, I think a P/E of 10 might be a more attractive multiple for the stock. On that basis, using City growth estimates for 2020, I reckon the Vodafone share price is worth approximately 94p, a further decline of 33% from current levels.
Having said all of the above, I don’t expect the share price to fall below 100p anytime soon as the stock’s market-beating dividend yield is currently providing a lot of support.
But there is a chance this distribution could be cut in the next two years. Some City analysts believe the group will face a cash crunch in the near term as it tries to fund the €19bn buyout of peer Liberty Global’s European assets, manage its capital spending obligations and return cash to investors.
Management has said it stands by the payout for the time being. But if debt continues to rise, Vodafone may have to make some hard choices. If the payout’s cut, the dividend support will be removed and the stock could fall all the way down to 94p.
So overall, I think the Vodafone share price can fall under 100p, although it’s impossible to say when it will happen. With this being the case, I think it might be sensible for investors to look elsewhere for income.
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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has recommended Verizon Communications. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.