Patience is one of the key attributes of a successful investor. The likes of US master Warren Buffett have been known to wait years for the right company at the right price.
Now, while buying stocks at a fair price will tend to pay off over the long term, we all love to bag a real bargain.
Today, I’m going to tell you the price I believe would put Vodafone Group (LSE: VOD) (NASDAQ: VOD.US) in the bargain basement.
Old Vodafone/New Vodafone
Vodafone’s sale of its 45% stake in US phones firm Verizon Wireless (VZW) to Verizon Communications was a game-changer. The $130bn (£84bn) deal was announced in September last year, and completed in February this year.
Vodafone needs to replace the lost earnings from VZW, but this isn’t going to be achieved any time soon. As such, there is a dramatic difference in the valuation of ‘old’ Vodafone and ‘new’ Vodafone.
The table below shows analysts’ P/E and dividend yield 12-month forecasts on selective pre-deal and post-deal dates for which I still happen to have data.
| Share price | P/E | Dividend yield (%) | |
|---|---|---|---|
| Today | 206 | 31.3 | 5.6 |
| July 2014 | 196 | 27.5 | 5.9 |
| Feb 2014 | VZW | Deal | Completed |
| Sep 2013 | VZW | Deal | Announced |
| July 2013 | 188 | 11.5 | 5.5 |
| April 2013 | 187 | 11.4 | 5.9 |
As you can see, the P/E has rocketed due to the loss of the future earnings contribution from VZW.
The market is demanding we pay a sky-high P/E of 31.3 for a company that’s on an acquisition spree to replace lost earnings, with all the risk that entails: overpaying for assets, unforeseen integration problems, and so on.
For Vodafone to trade today on the same kind of P/E as before the VZW sale, the share price would need to come down to 75p!
You can see, then, that there are real problems with trying to put a fair earnings multiple on Vodafone at this point in time.
Dividend
Taking dividend yield as a value marker, we can note that — in contrast to the P/E — Vodafone’s yield since the VZW sale is much the same as it was before. The difference is, though, that the forecast dividend (11.5p) is now uncovered by forecast earnings (6.55p).
Now, Vodafone has the resources to fund an uncovered dividend for awhile, but I’m going to value the company on the basis of a theoretical dividend covered by earnings (6.55p) and a market average forward yield (3.2%). That gets me to a fair-value share price pretty much bang in line with the current 206p.
But I want a bargain. So, I’m going to demand a discount of 25%, which gives me a share price of 155p. As it happens, that’s exactly the price at which I was highlighting Vodafone as a bargain for Fool readers back at the start of 2013.
