The Vodafone (LSE: VOD) share price has plunged in value this year. But I’m not convinced that the company is really worth less now than it was at the beginning of 2020.
As such, I reckon it could be worth buying the stock today. It appears to offer one of the best risk-reward opportunities in the FTSE 100 right now.
Vodafone share price opportunity
Vodafone has been working through some severe headwinds over the past few years. Rising competition in its core UK and European markets, as well as an ongoing battle with authorities in India, have dampened investor sentiment towards the group.
A highly leveraged balance sheet also forced management to cut the company’s dividend last year, to free up more cash for debt repayment.
However, it looks as if the business has worked through many of these issues. A couple of months ago, the group announced that it would stick by its final dividend for the year. This was thanks to free cash flow growing by more than a tenth to €4.9bn during the first half. Meanwhile, pre-tax return on capital employed — a measure of profitability for every £1 invested in the business — rose from 5.3% to 6.1%.
These numbers tell me that Vodafone is progressing with its transformation. Indeed, management attributed part of the higher return on assets to the group’s digital transformation and improving asset utilisation.
Unfortunately, group debt continues to weigh on the Vodafone share price. Net debt ballooned by more than half to €42.2bn in the first part of the company’s current financial year. The purchase of Liberty Global‘s European assets was responsible for a large part of the increase.
Still, the group says it’s on track to list its European tower business in the first half of next year, which should give the company a cash infusion. It’s also planning to deliver €1bn net cost savings from its three-year digital transformation programme.
Income and capital growth
Considering all of the above, I reckon that while the near term outlook for the Vodafone share price is uncertain, in the medium to long term, the stock should prove to be a good investment.
More importantly, it doesn’t seem as if the company is going to cut its dividend again any time soon. That’s good news for income investors. The stock currently supports a dividend yield of 7.5%, giving it one of the highest dividend yields in the FTSE 100. This level of income also implies that investors will be paid to wait for the company’s turnaround to play out.
Further, the Vodafone share price looks desperately cheap after recent declines. The stock is trading at an enterprise value-to-earnings before interest tax depreciation and amortisation (EV/EBITDA) ratio of 4.2. The rest of the telecommunications sector is dealing at an EV/EBITDA ratio of 5.2, suggesting Vodafone is undervalued by around 25%.
Therefore, I think this could be one of the best stocks to buy now based on its income and capital growth potential.
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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.