The Motley Fool

Vodafone stock looks pricey but I find it’s 6% yield hard to resist

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Image source: Getty Images

There is no doubt about it, Vodafone Group (LSE: VOD) stock looks expensive judging by today’s price/earnings ratio. That puts it at 27.3 times earnings, almost exactly double the FTSE 100 as a whole, which ended last year at 13.66 times.

While valuation is just one figure I look at when deciding whether to buy a company, I am typically reluctant to invest in any FTSE 100 stock trading at such a pricey figure. Unless it’s an exciting momentum stock, such as JD Sports Fashion or Boohoo Group, which Vodafone definitely is not.

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US$12.3 TRILLION out of thin air…

And if you click here we’ll show you something that could be key to unlocking 5G’s full potential...

Having said that, there are reasons why I’d consider Vodafone for my portfolio. The first is its forward valuation is a more amenable 15.2 times earnings. That suggests we might see higher earnings next year. So today’s P/E ratio alone won’t put me off.

FTSE 100 income hero

The number that catches the eye when examining Vodafone stock is the dividend yield. Few investors expect significant share price growth from the telecoms giant, given that it’s gone nowhere fast for the last 20 years. They demand income though.

The Vodafone share price spiked to a dizzying 459p on 24 March 2000, directly before the dot com crash. It then crashed to 111p by September 2002 and has gone nowhere slowly since. Today, you can buy it at 131p, which makes it 12% cheaper than a year ago.

Yet in the land of the near-zero savings account, the high-yielding stock is king. Vodafone currently offers a forecast yield of 6.1%. That is more than 33 times the average savings account’s 0.18%. No wonder it remains in demand. The worry is that cover is water thin, at just 1.1, but few analysts expect Vodafone to cut payouts at the moment.

Management preserved the dividend throughout last year’s pandemic, as more than half of the FTSE 100 cut theirs. That was largely because it had already imposed a massive 40% cut, in May 2019. I supported the move at the time, as it made the shareholder payout more reliable. So it’s proved.

Germany is now Vodafone’s largest market, and it has remained strong throughout the pandemic. As a result, management group recently posted only a small decline in third-quarter organic revenues of just 0.3%.

Vodafone stock is mixed bag

Vodafone has been relatively resilient against Covid, boosting digital revenues to offset lost sales on shuttered high streets. However, it’s been knocked by the collapse in international travel, which has hit roaming revenues. This arguably makes it a recovery stock, as it should benefit when people finally start flying again.

Management expects to deliver between €14.4bn and €14.6bn in underlying cash profit this year, which includes €5bn in free cash flow before spectrum and restructuring costs. That eases some of my concerns about its high borrowings. Net debt is stubbornly high at €44bn, dwarfing its €30bn market-cap, and hasn’t fallen much for years.

I’m still tempted to buy Vodafone stock, but I suspect there are more tempting income shares on the FTSE 100 right now.

Like these.

5 Stocks For Trying To Build Wealth After 50

Markets around the world are reeling from the coronavirus pandemic…

And with so many great companies trading at what look to be ‘discount-bin’ prices, now could be the time for savvy investors to snap up some potential bargains.

But whether you’re a newbie investor or a seasoned pro, deciding which stocks to add to your shopping list can be daunting prospect during such unprecedented times.

Fortunately, The Motley Fool is here to help: our UK Chief Investment Officer and his analyst team have short-listed five companies that they believe STILL boast significant long-term growth prospects despite the global lock-down…

You see, here at The Motley Fool we don’t believe “over-trading” is the right path to financial freedom in retirement; instead, we advocate buying and holding (for AT LEAST three to five years) 15 or more quality companies, with shareholder-focused management teams at the helm.

That’s why we’re sharing the names of all five of these companies in a special investing report that you can download today for FREE. If you’re 50 or over, we believe these stocks could be a great fit for any well-diversified portfolio, and that you can consider building a position in all five right away.

Click here to claim your free copy of this special investing report now!

Harvey Jones 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.

Our 6 'Best Buys Now' Shares

Renowned stock-picker Mark Rogers and his analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.

So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. Because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply click below to discover how you can take advantage of this.