The Vodafone Group (LSE: VOD) share price has sunk as it reduced its profits forecast for the full year. At 97.2p, the FTSE 100 firm was last trading 7% lower on Tuesday, having slipped to two-year lows earlier in the session.
Is today’s share price slump an overreaction? And should I consider buying the beaten-down telecoms business for my portfolio?
Inflation hits earnings forecasts
Vodafone has reduced its full-year earnings guidance following a spike in costs. Adjusted earnings for the 12 months to March 2023 are now tipped at between €15bn and €15.2bn. This is down from a previous forecast of €15bn-€15.5bn.
Vodafone also slashed its free cash flow guidance for the year. It’s been trimmed by €200m, to €5.1bn.
In response, chief executive Nick Read said the firm is “taking a number of steps to mitigate the economic backdrop of high energy costs and rising inflation.” These include addressing pricing in its core European marketplace and introducing energy efficiency measures across the business.
Furthermore, the firm has launched a cost-savings programme to streamline and simplify its operations. It hopes to make savings of above €1bn from the plan through to 2026.
First-half profits slump
During the first half, Vodafone’s revenues rose 2% year on year to €22.9bn. This was thanks to higher equipment sales and better service revenues (which rose 2.5% in the period).
However, adjusted earnings dropped 2.6% between April and September to €7.2bn. It said “revenue growth [was] offset by a prior year one-off legal settlement in Italy… and commercial underperformance in Germany“.
Elsewhere, Vodafone endured an adjusted free cash outflow of €500m versus an inflow of €23m a year earlier. Net debt rose €3.9bn to €45.5bn because of cash outflows, dividend payments and share buybacks.
What should I do?
Telecoms companies like this can be great investments when times get tough. As today’s half-year report shows, revenues tend to remain robust at all points of the economic cycle. Businesses need to remain connected and mobile phones and broadband packages are everyday essentials for modern consumers.
The trouble for Vodafone is that costs are rising rapidly and could continue spiking. It is also losing customers in Germany following the introduction of the Telecommunications Act there. The company sources 30% of group service revenues from there, so it’s a big deal.
8.2% dividend yield
Still, Vodafone’s share price slump today is tempting me to invest. The company now trades on a rock-bottom forward P/E ratio of 10.6 times. Meanwhile its dividend yield has leapt to 8.2%.
As a long-term investor, I’m still excited by its overall profits outlook. The rollout of 5G and broadband could supercharge revenues growth over the next decade. Its accelerated cost-saving measures should also create a leaner earnings-creating machine looking ahead.
I’m also encouraged by the rate at which it’s winning business in Africa. It added another 8.6m mobile phone and mobile money customers in the six months to September. This takes the total to a whopping 243.6m.
The near-term risks facing Vodafone have increased. But at current prices, I think it could still be a top buy for my portfolio. Time for a bit more research.
