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Should you buy Vodafone shares before markets recover?

Despite their defensive qualities, Vodafone (LSE: VOD) shares did not escape the recent stock market crash. Shares in the telecoms group are down 12% so far this year.

However, in recent weeks, the stock has staged a modest recovery. It’s now up around 20% since its mid-March low. 

The question is, as markets around the world continue to recover from their coronavirus setback, is time running out to buy Vodafone shares? 

Dividend champion  

Vodafone is one of the few companies in the world that has only suffered a limited impact from the coronavirus crisis. Revenue for the company’s 2020 financial year increased by 3%. Meanwhile, adjusted earnings before interest tax depreciation and amortisation (EBITDA) jumped 2.6%. 

But Vodafone isn’t without its problems. Net debt at the group jumped by 56% last year to €42bn. To try and save money, management is planning €1bn of net cost savings over the next three years. 

And while many other FTSE 100 companies have recently cut their dividends, Vodafone shares remain one of the index’s top income stocks. Shares in the telecoms giant currently support a dividend yield of 6.5%. 

Considering the current economic environment, the company is expecting EBITDA to remain flat or decline slightly next year. But this is better than most businesses.

Vodafone is one of the most important telecommunications companies in Europe. It has really proved its worth over the past few months. The fact that management only expects a slight decline in EBITDA next year stands testament to the business’s strengths. 

Mixed outlook

All of the above suggests the outlook for Vodafone shares is mixed. The company might offer a market-beating dividend yield, but falling earnings will put pressure on the payout over time.

Indeed, the dividend payout is only just covered by earnings per share. That’s a worrying sign and could suggest that Vodafone is paying out more than it can afford. 

On top of this, Vodafone shares look relatively expensive at current levels. The stock is trading at a forward price-to-earnings (P/E) multiple of 16, compared to the sector average of 12. 

As such, I’m optimistic on the outlook for Vodafone shares, but only cautiously so. While the stock does look attractive as an income investment, management may be forced to cut the dividend in the years ahead.

However, as the world becomes increasingly reliant on technology, the company’s dominant position in the European telecoms market should allow it to achieve steady growth over the long term. 

Therefore, if you want to buy Vodafone shares, it may be best to do so as part of a well-diversified portfolio. This would allow you to benefit from the company’s income credentials while minimising downside risk if management has to cut the dividend in the years ahead.

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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.