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Here’s why I see the Vodafone share price as a top ISA buy today

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Vodafone (LSE: VOD) has suffered slightly less badly than the FTSE 100 in the Covid-19 crash. While the Footsie has fallen 19% since the start of the year, the Vodafone share price is down 16%.

I’m seeing a big name in the race for 5G phone technology seriously underrated though, admittedly, not without problems. I think we have a buying opportunity here.

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Vodafone gave us an update Friday. Revenue has been impacted a little by the lockdown, with roaming charges reduced by people staying at home. But, overall, organic service revenue declined only by a modest 1.3%.

When I compare that to the revenue hits so many companies have suffered during the crisis, I’m impressed. It makes Vodafone look very much like a defensive stock to hold right now. And that also has me scratching my head over the poor performance of the Vodafone share price.

In the past, I’ve viewed Vodafone’s corporate structure as a little disjointed. I was seeing a mixed bag of disparate businesses, and I couldn’t grasp the company’s overall direction. But I see that improving significantly now, as Vodafone is focusing more on its core 5G and other technological developments.

Vantage Towers

As part of its restructuring, Vodafone will spin off its mobile phone towers business, via a Frankfurt IPO planned for early 2021. The business, to be known as Vantage Towers, currently owns and operates close to 70,000 towers across Europe. I see this as a sensible restructuring move, and I think it should provide support for the Vodafone share price over the longer term.

Vodafone’s earnings have fallen back a little over the past couple of years. But, as a company goes through phases of technological development and costs, that doesn’t worry me. And analysts have a return to EPS growth penciled in for the year to March 2021. On the cash front, Vodafone has reiterated its guidance for free cash flow of at least €5bn in the current year, and that helps ease my concerns on the dividend front.

Sustainable dividends?

I think the excessive payment of dividends has been holding back the Vodafone share price, which is down nearly 50% in five years. Consistently paying dividends in excess of earnings per share, as Vodafone had a chronic habit of doing, is unsustainable. Investors knew that, and many expected a cut and were surely keeping away.

Thankfully, Vodafone reined in its excess with a dividend reduction in 2019. But, even after that, we’re still not seeing the forecast payments quite covered by earnings. Even with two years of double-digit EPS growth on the cards, the dividend would only be barely covered by 2022.

Vodafone share price growth

Still, I can see Vodafone’s growth trajectory continuing as 5G expansion progresses, though I think the firm’s debt could put further pressure on the dividend. And I aslo think the Vodafone share price will continue to be held back while the dividend remains uncovered. But, with a P/E dropping to 15 based on 2022 forecasts, I still rate Vodafone as a long-term growth and dividend buy.

I say stash Vodafone in your ISA, and leave it there for 10 years.

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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.

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