The Vodafone Group (LSE: VOD) share price is bumping along at about 130p — its lowest level since the 2008 financial crisis. Is the telecom giant’s lowly share price justified? Probably, in my view.
Should you sell the shares? I don’t think so. Here, I’ll explain why I feel holding onto Vodafone stock might be the best plan right now.
Finally, what a relief!
In May, Vodafone boss Nick Read finally bowed to necessity and cut the group’s dividend by 40%. Shareholders may have felt disappointed, but in my view this was a good decision that should end up helping investors.
When I last looked at the telecoms giant in March, I explained why I thought the group’s debt levels were too high. My view was that the company’s latest issue of debt seemed like a cunning plan, but didn’t leave any scope for debt repayments. Put simply, I thought Read was in danger of being too clever for his own good.
A cash cow?
The dividend cut put Vodafone back on my radar as a potential buy. You see, despite the firm’s heavy investment in new networks, its free cash flow is still pretty good. Last year, the firm generated €4.4bn of free cash flow, even after buying 5G spectrum and paying cash restructuring costs.
This level of free cash flow would have been swallowed up by the old dividend, leaving no cash spare for debt reduction. But my sums suggest if this level of cash generation can be maintained, the new reduced dividend should leave about €1.5bn spare to help reduce debt. Ultimately, that’s good news for shareholders as it makes the dividend safer.
Buy, sell or hold?
I think Vodafone could remain out of favour with investors for a little while longer yet. But I no longer view the stock as a sell. In my view, the company’s continued strong cash generation and dividend cut make the valuation seem much more appealing.
It’s worth noting that at current levels, this global business is trading on just 8.7 times free cash flow. I think that’s an attractive valuation, if it’s sustainable.
A second attraction is that earnings are expected to rise significantly next year. Broker forecasts show City analysts expect earnings to rise by 27% to €0.10 per share in 2020/21. That would put the stock on a fairly reasonable rating of 14 times earnings.
Even after the dividend cut, VOD shares offer a forecast dividend yield of 6.9% for the current year. That puts the shares firmly into high-yield territory.
I won’t be adding Vodafone shares to my portfolio, because I already own BT Group shares. The broadband and mobile group is too similar for me to want to double up.
But if I was looking for a telecoms dividend stock to buy today, Vodafone would definitely be on my radar and might be my top choice.
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Roland Head owns shares of BT GROUP PLC ORD 5P. The Motley Fool UK has no position in any of the shares mentioned. 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.