The Motley Fool

Why I think the Vodafone share price could surge in 2020

On Wednesday, Vodafone (LSE: VOD) told us it has agreed to sell its 44% shareholding in Vodafone Egypt.

The sale, for $2,392m to Saudi Telecom Company, is not in itself particularly momentous. But I think it represents one more step in Vodafone’s improving business focus.

Claim your FREE copy of The Motley Fool’s Bear Market Survival Guide.

Global stock markets may be reeling from the coronavirus, but you don’t have to face this down market alone. Help yourself to a FREE copy of The Motley Fool’s Bear Market Survival Guide and discover the five steps you can take right now to try and bolster your portfolio… including how you can aim to turn today’s market uncertainty to your advantage. Click here to claim your FREE copy now!

It comes a few days after it announced a partnership with Sunrise of Switzerland. I like to see the group taking part in more modern networks and services in developed countries. We’ve had a series of new tie-up announcements, and I think it’s mostly heading in the right direction.

For a long time, I’ve seen Vodafone as a ragbag of worldwide phone companies. In fact, I’ve found it hard to see anything beyond the sum of the parts. Couple that with a long-term overvaluation, plus stubborn and unaffordable high dividends, and I saw a sell.


The dividend problem has been, at least partially, alleviated now. Vodafone finally slashed the annual payment, by 40%, for the year to March 2019. But it was still nowhere near covered by earnings that year. Cover should return by 2021 if analyst forecasts are accurate, but it will be very thin at around 1.1 times.

But sentiment, at least, does seem to be turning in Vodafone’s favour. After falling approximately 40% in the five years to May 2019, Vodafone shares have been picking up. And since that 2019 low, we’ve seen a 24% rise.

Forecast earnings for the year to March 2020 put Vodafone shares on a P/E of 24, which might seem steep. But after a few up-and-down years, analysts are predicting some solid earnings growth to come.

A predicted EPS increase of 35% in 2020/21, followed by another 20% for 2021/22, would drop the P/E to around 14.5. If earnings rises should continue beyond then, I could see that as a tempting growth valuation. But it’s more than two years away, 5G technology is only just getting started, and there’s intense competition.


I do expect the Vodafone share price recovery to continue throughout 2020. That’s essentially because the 5G thing, plus those earnings forecasts, paint a tempting growth picture. And investors always seem ready to jump on the next growth prospect.

But I fear the optimism is premature, and that the resurgence could turn bad again over the next couple of years. Vodafone will need to invest a lot of cash before it sees big profits from 5G technology, and I wonder if those forecasts are unjustifiably rosy.

Then there’s Vodafone’s debt. At the halfway stage at 30 September, net debt stood at €48.1bn, up from €27bn at 31 March. That massive rise was partly due to assuming debt of €18.5bn from the acquisition of Liberty Global assets, but some was down to cash outflow.

Dividend again

That doesn’t help with the expenditure needed for all that 5G investment. Vodafone’s withdrawal from its older and lower-technology markets and the offloading of those assets is generating cash. But they’re not huge sums, and I can see a financial squeeze coming.

The dividend cut that we’ve already seen needed to have come a lot sooner, and I reckon the current dividend should be pared back even further. Until I see Vodafone’s cash management looking a lot more settled, I’m keeping away — even if I do think there’ll be short-term gains.

A top stock with enormous growth potential

Savvy investors like you won’t want to miss out on this timely opportunity…

Here’s your chance to discover exactly what has got our Motley Fool UK analyst all fired up about this ‘pure-play’ online business.

Not only does this company enjoy a dominant market-leading position…

But its capital-light, highly scalable business model has been helping it deliver consistently high sales, astounding near-70% margins, and rising shareholder returns … in fact, in 2019 alone it returned a whopping £151.1m to shareholders in dividends and buybacks!

And here’s the really exciting part…

We think now could be the perfect time for you to start building your own stake in this exceptional business—especially given the two potentially lucrative expansion opportunities on the horizon that our analyst has highlighted.

Click here to claim your copy of this special report now — and we’ll tell you the name of this Top Growth Stock… free of charge!

Alan Oscroft 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.