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Will Vodafone ever make a successful comeback?

The Vodafone (LSE: VOD) share price has printed one of the most disappointing performances of all FTSE 100 stocks over the past five years. The stock has underperformed the FTSE 100 by around 7% per annum since the beginning of 2016.

That means £10,000 invested in the company back in March 2016 would be worth just under £8,000 today. The same investment in the FTSE 100 would be worth more than £12,000. All these figures include dividends. 

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Over the past 10 years, the company’s performance is slightly better, but only just. The stock has lagged the index by 0.5% per annum since the beginning of March 2010. 

The big question is, should investors expect this performance to continue, or are Vodafone’s fortunes about to turn around?

A lack of growth

Vodafone’s biggest problem is its location. The company’s key markets are the UK and Europe, which also happen to be some of the most competitive telecommunications markets in the world. 

This means that while the business does have unrivalled size and scale, it cannot charge whatever it wants. And that is a big problem. Vodafone has to compete with its competitors to provide the best offer, which is excellent news for consumers, but not such good news for investors. 

At the same time, the enterprise is having to spend billions on its network infrastructure and spectrum rights to stay ahead of the competition. 

International diversification has only provided limited benefits for the group. It is suffering from the same pressures in India as it is in the UK and Europe.

In fact, after a recent tax claim against the group’s Indian business, the company is considering shutting up shop in the region. In 2016, Vodafone injected more than $7bn into its Indian entity. 

Vodafone is spending billions of euros every year on its network with little to show for it. This seems to be the main reason why the company has underperformed the FTSE 100 over the past decade.

Since 2014, its revenues have hardly budged and operating profit has disappointed as well. During these six years, the company has spent a total of €57bn on capital projects. Although it has also returned €25.6bn to shareholders, the business is going nowhere fast. 

Income champion

The figures above suggest that Vodafone is running on a hamster wheel. It’s spending billions on its network, but this spending isn’t translating into growth. In other words, the group seems to be running just to stand still.

Vodafone’s one redeeming feature is its dividend yield. At the time of writing the stock supports a dividend yield of 6.3%, above the FTSE 100 average of 4.7%. 

That suggests that if you are looking for a defensive dividend stock to add to your portfolio today, Vodafone could be a great bet. However, based on its past performance and capital spending obligations, it does not look as if this is a stock for growth investors. 

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Rupert Hargreaves 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.