For a long time, I viewed Vodafone (LSE: VOD) shares as overpriced. Compared to its peers, I really saw no justification for Vodafone commanding a significantly higher fundamental valuation. But, over the past five years, the Vodafone share price has fallen by 44%, and I’m finding it harder to ignore.
The Covid-19 crisis has taken its toll, though I’m not really sure why. Vodafone’s business really is a very long-term one, and I don’t see how even the 2020 economic catastrophe should have any lasting effect. Perhaps it’s just fears over general economic malaise, but the Vodafone share price did crash by 33% at the lowest point of 2020.
Signs of a FTSE 100 recovery are emerging, and Vodafone looks like it’s ahead of the trend. Since its low point in March, the share price has gained 30%. So far in 2020, Vodafone has fallen a relatively modest 12%, compared to 17% for the FTSE 100.
Vodafone’s full-year results, released on 12 May, give me cause for optimism too. I’ve criticised Vodafone in the past for carrying too much debt. Oh, and for paying out big dividends that weren’t covered by earnings. That’s effectively borrowing money to pay to shareholders, and I see no sense in it.
Dividend more realistic
But Vodafone reduced its dividend in 2019. And the latest results suggest it’s finally paying attention to its balance sheet and trying to cut costs. Debt remains my greatest concern, and I think it will continue to put pressure on the Vodafone share price. At 31 March, net debt stood at a whopping €42.2bn. That’s more than half as much again as the €27bn a year previously. And it represents a net debt to adjusted EBITDA ratio of 2.8 times, a big escalation on 2019’s figure of 1.9 times.
But the debt situation is complicated. Vodafone says the figures represent “net debt adjusted in FY20 to exclude derivative gains in cash flow hedge reserves, the corresponding losses for which are not recognised on the bonds within net debt and which are significantly increased due to COVID-19 related market conditions.”
That’s too complex for me to try to unpick here. But I definitely want to see how debt management goes over the coming year.
Vodafone share price cheap?
Vodafone also seems to me to be getting its focus a bit, well, better focused. In the past, it’s looked to me more like a jumble of disparate businesses rather than the joined-up global telecoms powerhouse that it needs to be. That’s changing, as the firm’s been shedding some non-core businesses and concentrating on its key strengths.
Then there’s the dividend. With Vodafone, you can bag yourself a forecast 6.2%, which is rare among FTSE 100 stocks now. And, though I’m still wary of paying out too much money while in debt, I see it as reasonably safe.
So yes, I like the Vodafone share price now. And I reckon 2020 could turn out to be the year to buy. In fact, 2020 could be telecoms’ year.
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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.