The Motley Fool

3 reasons why the Vodafone share price could keep crashing

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Image source: Getty Images

There’s no hiding the fact that, over the past 12 months, the Vodafone (LSE: VOD) share price has been a pretty poor investment. Indeed, since the beginning of September 2018, the stock has underperformed the FTSE 100 by around 5%. Over the past three years, it’s underperformed by more than 12%, even after including distributions to investors. 

There are several reasons why the company has underperformed in recent years, and I think there’s a good chance these worries will continue to weigh on the business going forward.

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US$12.3 TRILLION out of thin air…

And if you click here we’ll show you something that could be key to unlocking 5G’s full potential...

Rising borrowing 

The first reason why investors have been selling Vodafone is debt. The firm has a lot of it. Before the acquisition of Liberty Global’s German and Eastern European networks, the company’s debts stood at around €27bn. The enterprise value of Liberty’s assets was around €18bn, which implies Vodafone’s borrowing is now in the region of €45bn. 

Management is trying to get borrowing down. The company has cut its dividend payout by around 40%, which should save several billion a year, and Vodafone New Zealand has been flogged for €2.1bn. There’s also been talk of an IPO of group’s tower business. This enterprise could be worth as much as €12bn.

However, even if the tower business is spun off with that price tag, Vodafone will still have an eye-watering amount of debt. And the company can’t afford to scrimp on investment. It needs to invest billions in new spectrum rights as well as infrastructure around the world to keep ahead of the competition. These demands on cash flow will only make paying down debt harder.

Dividend concerns 

With borrowing remaining stubbornly high, there are concerns Vodafone will have to cut its dividend once again. As noted above, the company has already slashed its payout once in the past 12 months (after promising not to). If leverage remains elevated, the firm might have to do so again. 

Even after its dividend cut, the stock is an attractive income investment at current levels. It currently supports a dividend yield of 5.5%. Unfortunately, the distribution isn’t wholly covered by earnings per share, so it doesn’t look as if it’s living on borrowed time.

High price 

The third and final reason why I believe the Vodafone share price could continue to fall is the stock’s current valuation. At the time of writing, shares in the telecoms giant are trading at a forward P/E of 20, a valuation more suited to a high-growth tech company than indebted telecoms giant.

While the Liberty acquisition will boost earnings per share by 26% in fiscal 2021, according to City analysts, even after this expansion, the stock’s multiple will still be a relatively high 16.1. 

There are a handful of other companies in the FTSE 100 that both offer a higher level of income than Vodafone right now, and trade at a cheaper multiple of earnings. Many of these businesses also have a lower level of borrowing.

With this being the case, I would avoid the Vodafone share price and put my money to work in one of these FTSE 100 income champions instead. 

“This Stock Could Be Like Buying Amazon in 1997”

I'm sure you'll agree that's quite the statement from Motley Fool Co-Founder Tom Gardner.

But since our US analyst team first recommended shares in this unique tech stock back in 2016, the value has soared.

What's more, we firmly believe there's still plenty of upside in its future. In fact, even throughout the current coronavirus crisis, its performance has been beating Wall St expectations.

And right now, we're giving you a chance to discover exactly what has got our analysts all fired up about this niche industry phenomenon, in our FREE special report, A Top US Share From The Motley Fool.

Click here to claim your copy now — and we’ll tell you the name of this Top US Share… free of charge!

Rupert Hargreaves owns no share 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.

Our 6 'Best Buys Now' Shares

Renowned stock-picker Mark Rogers and his analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.

So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. Because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply click below to discover how you can take advantage of this.