It’s been a great November for UK shareholders, with share prices soaring. By Tuesday, the FTSE 100 index had jumped as high as 6,463.5 points, up over 885 points (15.9%) since Halloween. As I write, the Footsie hovers around 6,318 points, down 145 points (2.25%) from Monday’s peak.
This November boost to stocks comes after Joe Biden won the US election, followed by news of two promising Covid-19 vaccines. In the US, share prices have also been buoyant, with the S&P 500 hitting all-time intra-day and closing highs on Monday. The US index is up 10.2% in 2020, but the FTSE 100 has slumped 16.2% this year. Thus, I can still see bargains for sale in the Footsie today — here’s one of my favourite cheap shares.
Cheap shares: Vodafone suffers under Covid-19
Vodafone Group (LSE: VOD), the global telecoms Goliath, is a household name in many parts of the world. Twenty years ago, before the dotcom bubble burst, Vodafone was the most valuable company in Europe. Today, it isn’t even one of the FTSE 100’s top-10 biggest firms, but is still a huge business. Across Europe and Africa, Vodafone has a staggering 625 million customers in 65 countries. Despite this huge and diverse customer base, Vodafone has been hurt by the coronavirus crisis, dumping its cheap shares into the bargain bin.
On 27 November 2019, Vodafone’s share price was bullish, closing at a 52-week high of 160.44p. Alas, Covid-19 restrictions reduced mobile-phone sales and curbed Vodafone’s revenues from roaming charges, travellers, and tourists. But while the company’s business was doing just fine, its share price almost halved. By 4 September (less than 11 weeks ago), Vodafone’s cheap shares had collapsed to a 2020 low of 87.1p. For me, that was a crazily cheap price, so Vodafone duly obliged by rebounding.
The Vodafone share price bounces back
At the end of October, you could still buy cheap shares in Vodafone for around a pound (103p, to be exact). A week before this, I argued that Vodafone’s financial strength and secure, predictable cash flows made it a sound buy. This month, Mr Market lit a rocket under this ‘unloved’ value share. On Monday, Vodafone’s share price surged to almost 128p, up 25p — almost a quarter (24.3%) — since October. Today, Vodafone’s stock trades at 121.78p — down 4.8% from Monday’s high, but still a tidy 18.2% ahead in November.
Would I buy into this great British success story — valued at £32.1bn — at the current price? You bet I would, because Vodafone’s attractions as a value share remain unchanged. Its huge cash flows — totalling £4.5bn a year — enable Vodafone to pump massive cash dividends to its shareholders. At the current price, Vodafone’s cheap shares offer a 6.6% a year cash return, paid half-yearly. Where else could you such a high income without taking massive risks with your capital?
Lastly, Vodafone is evolving — and this could be very profitable for its owners. The company plans to float off its highly profitable masts division via an IPO (initial public offering) of shares on the Frankfurt stock market in 2021. The new business, Vantage Towers, could be valued at £13bn or more. This IPO should partially unlock the hidden value of Vodafone’s substantial real-estate assets, helping to reduce its debt mountain. For sure, this listing will create a stronger Vodafone. That’s why I’d buy these cheap shares today, ideally in an ISA, to pocket bumper tax-free dividends and future capital gains!
