Shares in FTSE 100 dividend stalwart Vodafone (LSE: VOD) plunged in 2018, sliding a total of 29.2% including dividends over the past 12 months. Over the same period, the FTSE 100 slumped 8.7%. Vodafone underperformed the market by 20.5% in 2018.
This was a sharp turnaround from 2017 when shares in the telecommunications giant lept 24.2%, outperforming the FTSE 100 by 12.2%.
Unfortunately, the stock has disappointed over the longer term as well. According to my figures, £10,000 invested in the company back at the beginning of 2014 would be worth only £8,250 today compared to £11,800 for an investment in the FTSE 100. Going back to the beginning of 2009, £10,000 invested in Vodafone at this point would be worth £19,329 today, compared to £21,700 for the FTSE 100.
These numbers show clearly that the FTSE 100 would have been a better investment than Vodafone over the past 10 years. The question is, after recent declines, is its share price a FTSE 100 bargain?
An unmissable bargain?
Looking at the figures above, it might seem silly to suggest that Vodafone could be a FTSE 100 bargain. Indeed, the stock has underperformed for the past decade. But the numbers are somewhat misleading. If I strip out last year’s dire performance, Vodafone has outperformed the UK’s leading blue-chip index by several percentage points per annum since 2009.
So what has gone wrong for the company over the past 12 months? I think there are several factors. Firstly, there’s Brexit, which has sent investors from all over the world running from UK equities. The business can’t control this, and many other businesses in the FTSE 100 are seeing the same effect. Only time will tell if Brexit is going to be a big deal for Vodafone or not.
Second, there’s the company’s debt. Vodafone has a tremendous amount of net debt (€30.2bn to be exact), and the City is starting to become concerned that the group has borrowed too much. The €19bn acquisition of Liberty Global’s central European cable networks, which is yet to complete, is only exacerbating analysts’ concerns.
Last year, rumours started to circulate that the group was going to cut its dividend to free up more cash for debt repayment. As it turns out, the stories weren’t true, and towards the end of 2018, management pledged to maintain the dividend at the current level despite unveiling a first-half loss of €7.8bn following asset writedowns.
The company is planning an aggressive cost-cutting program to free up more capital instead, and this has allayed dividend concerns for the time being, but the share price has been slow to recover.
Time to buy?
Now Vodafone has guaranteed its dividend for the near future, I think the firm does look attractive as an income investment particularly after recent declines. The stock currently supports a dividend yield of 8.4%, making it one of the highest yielding shares on the market today. Even if it does eventually cut the payout by 50%, that will still leave investors with a yield of 4.2%.
Put simply, I think it is worth considering the company as an income investment after recent declines, but I would stop short of calling it an ‘unmissable FTSE 100 bargain’.
