The Motley Fool

Is the Vodafone share price a bargain?

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.

Risk reward ratio / risk management concept
Image source: Getty Images

The Vodafone (LSE: VOD) share price has been under pressure. The stock has returned around 5% year-to-date, compared to the FTSE All-Share’s near-8%.

Over the past 12 months, Vodafone has returned 0.4%, excluding dividends. The FTSE All-Share Index has returned nearly 20%, excluding dividends. 

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...

However, I think the stock is now trading at such an attractive level it could be worth buying, especially considering its dividend potential.

Vodafone share price on offer

The first thing I do before buying any stock is try to understand why the shares have performed the way they have recently. 

The stock has been under pressure after the company published its results for its financial year ending 31 March. The results revealed the group earned a profit of £3.8bn last year.

But revenues declined from £38.7bn to £37.7bn. Management blamed reduced income from mobile roaming and handset sales during the Covid-19 crisis for this decline. 

The company’s commitment to spend more in the coming years on developing its infrastructure also spooked investors. Infrastructure spending has always been a headwind for the company. Unfortunately, the group can’t skimp on spending. Vodafone needs to keep spending to stay up-to-date with the competition.

Even then, there’s no guarantee customers will stay with the business. Despite spending tens of billions of euros over the past few decades on new equipment, there’s not much differentiating Vodafone from other mobile providers, apart from price.

This is probably the biggest challenge the group faces. It will need to keep spending to stay up-to-date with the competition. But this doesn’t guarantee the company will achieve better returns than any other in the sector. This could be one reason why investors have been avoiding the Vodafone share price. 

Economies of scale

That said, Vodafone does have one key advantage. Size. Not only is it a european telecoms giant, but the company also has substantial operations around the world. Moreover, the firm bulked up its european business last year with the acquisition of Liberty Global.

Vodafone reckons it can achieve €535m a year in operating synergies as part of this deal. I think this clearly shows how size can benefit the group. If management’s correct, the additional cash flow will fund growth projects and reduce debt.

The company’s chunky dividend yield also supports the Vodafone share price. The stock currently supports a dividend yield of 5.5%. 

While some analysts have speculated that the payout could be cut to fund spending, in the current financial year Vodafone expects underlying cash profits of €15.0bn-€15.4bn, and underlying free cash flow of €5.2bn. I think that will be more than enough to cover the company’s dividend. However, nothing’s guaranteed at this point. 

Still, considering the company’s market-beating dividend yield and economies of scale, I think the stock could be a great acquisition to my portfolio after recent declines. That’s why I’d buy Vodafone today. 

The Motley Fool UK's Top Income Stock...

We think that when a company’s CEO owns 12.1% of its stock, that’s usually a very good sign.

But with this opportunity it could get even better.

Still only 55 years old, he sees the chance for a new “Uber-style” technology.

And this is not a tiny tech startup full of empty promises.

This extraordinary company is already one of the largest in its industry.

Last year, revenues hit a whopping £1.132 billion.

The board recently announced a 10% dividend hike.

And it has been a superb Motley Fool income pick for 9 years running!

But even so, we believe there could still be huge upside ahead.

Clearly, this company’s founder and CEO agrees.

Learn how you can grab this ‘Top Income Stock’ Report now

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.

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.