Despite a market capitalisation close to £27bn, shares in Vodafone (LSE: VOD) continue to change hands for under a pound each. But could that be about to change? Here are some potential drivers I see for the Vodafone share price in 2023 – as well as a key risk.
Notable interest
It’s been revealed that telecoms giant Liberty Global has bought a 4.9% stake in the UK-based operator. That could be significant, because Liberty has deep experience in telecoms industry consolidation.
However, that doesn’t necessarily mean Liberty will end up increasing its Vodafone stake. But I do see that as a possibility which, if it happens, would likely boost the Vodafone share price markedly.
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Valuing Vodafone
I find it interesting that a sophisticated, experienced global telecoms operator sees enough value at today’s Vodafone share price to buy shares worth over a billion pounds. Liberty has a far deeper understanding of telecoms valuations than me or most private investors. That could suggest today’s Vodafone share price is a bargain for my portfolio.
That might not be the case though. Liberty is a trade buyer, whereas a private investor like me has purely financial motives. Liberty may see some strategic value in a Vodafone stake that might not warrant any interest to me. As always in the stock market, I need to make my own judgment about how to value shares.
Then again, Liberty isn’t the only deep-pocketed investor sniffing around Vodafone. It was announced this month that Emirates Telecoms has also increased its stake in the business to over 13%. Although it has previously said it doesn’t plan to bid for all of Vodafone, that stake-building suggests that — like Liberty — it sees value at the current share price.
High-yield shares
Another indicator that might suggest the share price is too low, relative to its intrinsic value, is the current dividend yield.
The Vodafone share price has fallen 29% over the past year. While the dividend has been held flat, a falling price has pushed the yield up to 7.9%. That’s high for a blue-chip FTSE 100 firm.
But sometimes a high yield can signal danger. The City may be pencilling in a dividend cut from Vodafone, which is why the yield looks unusually tasty.
Balance sheet risk
The telecom company has past form in that regard, having cut its dividend by 40% in 2019. That move hardly inspires my confidence in the company’s dividend prospects.
It also had €45.5bn of net debt on its groaning balance sheet at the end of the first half of its financial year. Servicing that could eat into profits.
That creates a real risk of a dividend cut. In the first half, the company had an adjusted free cash outflow, meaning more money went out the door than came in. That was partly due to the company stumping up €1.3bn in dividends.
However, I continue to see value in the firm, thanks to its massive network, large customer base and strong brand. I think growing interest from investors including Liberty could help lift the Vodafone share price out of the doldrums. I continue to hold the shares.
