The Motley Fool

Why I’d still buy the Vodafone share price after its 20% rise

The Vodafone (LSE: VOD) share price ended last week at 149p and has gained over 20% since a multi-year low of 123p towards the end of May. I penned an article at that time in which I suggested the FTSE 100 giant’s dividend rebasing could be a springboard for a substantial rise in its shares, citing the precedent of Rio Tinto a few years ago.

Today, I’m going to look at the news flow since May, and explain why I still rate Vodafone a ‘buy’ at the current level.

Sign up for FREE issues of The Motley Fool Collective. Do you want straightforward views on what’s happening with the stock market, direct to your inbox? Help yourself with our FREE email newsletter designed to help you protect and grow your portfolio. Click here to get started now — it’s FREE!

Unlocking significant value for shareholders

There’s been plenty of positive news over the last couple of months. Notably on 26 July, an encouraging trading update and the announcement of a plan to create Europe’s largest tower company sent the shares over 10% higher on the day. In reviewing these developments, my colleague Paul Summers concluded that a recovery for Vodafone could finally be under way.

New chief executive Nick Read, right from delivering his first results last November, had hinted at the potential to unlock significant value for shareholders from the group’s tower infrastructure. He had advised: “As part of our effort to improve returns, we are creating a virtual internal tower company across our European operations, and we are reviewing the best strategic and financial direction for these assets.”

Last month’s update told us Vodafone intends to legally separate its portfolio of around 61,700 towers across 10 countries into a new company (TowerCo) that will be operational by May 2020. It added that preparations are under way “to monetise a substantial proportion of TowerCo over the next 18 months, depending on market conditions. The ultimate form of monetisation may include an IPO or disposal of a minority stake in TowerCo, as well as potential disposals of minority or majority stakes at an individual country level.”

It said the proceeds will be used to reduce group debt. Having completed the €18.4bn acquisition of Liberty Global‘s operations in Germany, the Czech Republic, Hungary, and Romania at the start of this month, the proceeds from the monetisation of TowerCo and the rebased dividend, will put Vodafone on a stronger financial footing.

Long-term growth and income

Meanwhile, the acquisition of Liberty Global’s assets has catapulted Vodafone into the position of Europe’s leading converged operator, with 54m cable and fibre households ‘on-net’ and a total next-generation network reach of 124m homes and businesses. Almost half its consumer European service revenues will now come from growing fixed and converged services.

For its financial year ending March 2020, City analysts are forecasting a 77% rise in earnings per share to 9.3 eurocents (7.75p at current exchange rates). At the current share price, the price-to-earnings ratio is 19.2, and the price-to-earnings-growth ratio is 0.25 — well to the good value side of this ratio’s fair value marker of 1. Meanwhile, on the rebased dividend of 9 eurocents (7.5p), the yield is an attractive 5%.

City analysts see earnings growth in excess of 20% for fiscal 2021, and I reckon Vodafone has strong long-term prospects as a growth-and-income investment. This is why I continue to rate the stock a ‘buy’ at the current price.

A Growth Gem

Research into unloved sectors can often unearth fantastic growth opportunities to help boost your wealth – and one of Fool UK’s contributors believes they’ve identified one such winner, which could be a bona-fide bargain at recent levels!

To find out the name of this company, and to get the full research report absolutely free of charge, click here now.

G A Chester has no position in any of the shares mentioned. 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.