Are Vodafone Group plc, Royal Mail PLC And Prudential plc Overlooked Value Buys?

Roland Head asks whether now is the time to buy Vodafone Group plc (LON:VOD), Royal Mail PLC (LON:RMG) and Prudential plc (LON:PRU).

| More on:

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.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Over the last couple of years, Vodafone Group (LSE: VOD) has kept investors happy and supported its share price with a generous dividend. But profits have crumbled.

Good omens

Adjusted earnings of just 4.6p per share are expected for the year which ended on 31 March. That’s nearly 20% less than last year’s adjusted figure of 5.55p per share. My feeling is that we are approaching a turning point.

So far, the omens are good. Vodafone reported a 1.2% rise in organic revenue during the final quarter of last year. Project Spring, which has formed part of a £19bn programme of capital expenditure, is now 92% complete. This year should see spending fall and free cash flow rise. The latest City forecasts suggest a 22% rise in adjusted earnings to 5.65p per share.

The only problem is that this isn’t really enough to justify Vodafone’s 226p share price, or its 11p per share dividend. In my view, Vodafone needs to rebuild its profit margins and take earnings north of 15p per share. Doing this could trigger share price gains.

I expect this to happen over the next couple of years, but it’s not a sure thing. There is a risk that profits will stagnate, the dividend will be cut and the shares will find a new, much lower trading level. That’s why I think Vodafone is a hold, but not necessarily a buy.

An asset-backed bargain?

Royal Mail (LSE: RMG) faces challenges from the decline in letter volumes, and intense competition in the parcel sector. But it’s worth remembering that Royal Mail also has a unique UK-wide infrastructure and delivery network.

I believe investors are focusing too heavily on the problems and not enough on Royal Mail’s attractions. This is a large business, which owns a lot of prime real estate. Yet the shares only trade on 1.4 times their tangible net asset value.

Royal Mail’s 2016 forecast P/E of 13.2 also seems undemanding, and last year’s 21p dividend was covered 1.5 times by free cash flow. This year’s dividend payout is expected to rise by 4% to 21.8p, giving a forecast yield of 4.6%.

In my view, the only thing that will stop Royal Mail thriving in this market and delivering attractive shareholder returns is poor management. I think the stock is good value at the current price.

Is this share price fall overdone?

Shares in Prudential (LSE: PRU) have fallen by 22% over the last year, but earnings forecasts for the current year have fallen by less than 5%. As a result of this de-rating, Prudential shares now trade on just 11 times 2016 forecast earnings.

That seems cheap to me, given that Prudential reported a 20% rise in the value of new business in 2015. The group’s strong cash generation is also attractive. Prudential generated £3,050m of surplus cash in 2015, more than three times the amount needed to pay its dividend.

I don’t see any reason why Prudential cannot continue to perform well. If it does, the shares could prove to be good value at current prices.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Roland Head owns shares of Royal Mail and Vodafone Group. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Person holding magnifying glass over important document, reading the small print
Investing Articles

Just released: our top 3 small-cap stocks to consider buying in October [PREMIUM PICKS]

Small-cap shares tend to be more volatile than larger companies, so we suggest investors should look to build up a…

Read more »

Investing Articles

How I’d use an empty Stocks and Shares ISA to aim for a £1,000 monthly passive income

Here's how using a Stocks and Shares ISA really could help those of us who plan to invest for an…

Read more »

Investing Articles

This FTSE stock is up 20% and set for its best day ever! Time to buy?

This Fool takes a look at the half-year results from Burberry (LON:BRBY) to see if the struggling FTSE stock might…

Read more »

Investing Articles

This latest FTSE 100 dip could be an unmissable opportunity to pick up cut-price stocks

The FTSE 100 has pulled back with the government’s policy choices creating some negative sentiment. But this gives us a…

Read more »

A young woman sitting on a couch looking at a book in a quiet library space.
Investing Articles

As the WH Smith share price falls 4% on annual results, is it still worth considering?

WH Smith took a hit after this morning’s results left shareholders unimpressed. With the share price down 4%, Mark Hartley…

Read more »

Investing Articles

The Aviva share price just jumped 4.5% but still yields 7.02%! Time to buy?

A positive set of results has put fresh life into the Aviva share price. Harvey Jones says it offers bags…

Read more »

Investing Articles

Can a €500m buyback kickstart the Vodafone share price?

The Vodafone share price has been a loser for investors in recent years, and the dividend has been cut. We…

Read more »

Frustrated young white male looking disconsolate while sat on his sofa holding a beer
Growth Shares

3 mistakes I now avoid when choosing which growth stocks to buy

Jon Smith runs through some of the lessons he's learnt the hard way over the years about what to look…

Read more »