A year ago, analysts in the City were forecasting a 33% fall in earnings per share (EPS) to 11.9p for Vodafone (LSE: VOD) (NASDAQ: VOD.US) for the year ending March 2015, but even that modest expectation has since collapsed and we’re now facing a 64% slump.
To be fair, we’ve had the sale of Vodafone’s stake in Verizon Wireless since then, which would take a fair amount off the bottom line. But six months ago we still had a consensus for EPS of 9.4p, and that’s since been slashed to 6.2p per share — although it has firmed up slightly over the past week from 6.1p.
And the picture for the year to March 2016 doesn’t look much better. From a guess of 9.7p per share six months ago, the brokers have downgraded their guidance to just 6.7p.
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A P/E of 37!
On those expectations coupled with today’s share price of 228p, we’re still looking at forward P/E ratios of 37 and 34 for this year and next, and that’s more than twice the FTSE 100‘s long-term average.
To muddy the waters further, dividend predictions for Vodafone way outstrip even the most optimistic of earnings forecasts. We currently have a consensus of 11.3p this year followed by 11.6p next, and that would provide yields of approximately 5% for each of the two years — well above the FTSE’s average of around 3%.
And what’s more, dividend forecasts are being lifted at the same time as EPS forecasts are falling — a year ago we had 10.8p per share forecast for this year, so that’s been hiked by 5% since then. And for 2016, we’ve seen an estimate of 11.2p six months ago being raised by 4%. On those figures, dividends would be barely more than half covered by earnings, so what’s happening?
Well, Vodafone is in a major transition phase right now and spending massive amounts of cash on network development — and while conventional mobile phone revenues are dwindling in the developed world, the company’s 4G offerings in those markets are really still only in their infancy.
European timing
The snail’s pace of the European recovery hasn’t helped, and even the most ardent of europhiles must be disappointed by the way the Union’s recovery strategy has been slow in producing results. But things are happening and the European economies could end up rebounding at just the right time for uptake of Vodafone’s 4G services — at interim time, chief executive Vittorio Colao told us that “In the next 18 months, we will reach 90% 4G coverage in Europe“.
Will Vodafone’s forecasts for the years beyond 2016 improve and will the company live up to them? I find it hard to see Vodafone as anything other than the sum of its parts, but analysts are optimistic — there’s a pretty firm Buy consensus out there right now.
