I’m putting together a new share buy list right now, and I’m positive towards Vodafone (LSE: VOD) these days. I obviously like to buy at bargain prices when I can, and the Vodafone share price has slumped during the stock market crash. But it’s spiked up 18% so far in November on the success of not one, but two Covid-19 vaccine trials. There’s a long way to go before a full recovery, so should I buy while the price is still low?
It’s a tough decision with so many FTSE 100 buy candidates out there. But we have just had first-half results from Vodafone, and I like them. Revenue fell by 2.3% to €21,427m, which is fine. And, thanks to some judicious cost-cutting, adjusted EBITDA of €7,023m only dipped by a modest 1.9%. Against the backdrop of 2020, I find that reassuring for the long-term Vodafone share price prospects.
Debt is falling, but still huge
My biggest concern over Vodafone has always been its net debt. And it has actually come down a little. From €48,107m a year previously, the fall to €43,983m is not as big as I’d like, but it’s in the right direction. It’s still a very big pile of debt, and the size of it bears repeating — nearly €44bn! But the markets didn’t seem too bothered, and the Vodafone share price ended the day 7% ahead.
Net debt-to-adjusted EBITDA is high too, at 3x. And I find that slightly worrying. I prefer to invest in companies where debt outstrips earnings ideally by less than 1.5x. Or on occasion, I can be comfortable with anything up to 2x if I can see evidence that it’s unlikely to do harm. So where do I stand on Vodafone’s debt? Well, Vodafone has been operating under large debt for many years and really hasn’t come under any great liquidity squeeze.
Vodafone share price attractive?
And despite my debt concerns, I still find today’s Vodafone share price very tempting. On the price at the time of writing, the forecast dividend would provide a yield of 6.7%. That’s a terrific level of income to contribute towards my retirement planning. But only if it’s sustainable.
Vodafone has maintained its interim dividend at 4.5 eurocents per share, suggesting there’s no panic in the need to preserve cash. I think the company will be reluctant to cut its dividend to provide short-term savings, after being forced into a big reduction in 2019. That year, the dividend was slashed by 40%, in the face of continuing lack of cover by earnings.
Is the dividend safe?
That spectre could be rearing its head again, at least in the short term. Earnings for the year ending March 2020 were not sufficient to cover the full-year dividend. And, though forecasts suggest an earnings recovery this year, we’d still see a shortfall. But cover should return by 2022, on current forecasts. And a few more years of earnings gains beyond that would surely result in healthy dividend cover.
As long as the dividend holds, which I think it will, I rate the share a buy. Vodafone is on my list of candidates.
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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.