The Vodafone (LSE:VOD) share price has fallen 27% since it was last over £1. As a shareholder in the telecoms giant, this has been a great source of frustration to me.
The collapse in the share price means the stock is presently yielding in excess of 10%. Although I welcome its generous dividend, I’m also hoping for some capital growth.
Big numbers
For the share price to be £1, Vodafone’s market cap needs to increase by 37% from its current level of £19.6bn, to £26.8bn.
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I’ve been looking at some forecasts to see whether this is likely.
For the year ended 31 March 2023, the company recorded adjusted earnings per share (EPS) of 11.45 cents (9.85p). With the share price currently around 73p, the implies a price-to-earnings (P/E) ratio of approximately 7.5.
EPS will therefore need to be 15.5 cents (13.33p) — an increase of 35% — for the £1 share price milestone to be achieved.
In 2023, the company made an adjusted profit after tax of €3.17bn. All things being equal, this would have to grow to €4.28bn.
Is this going to happen?
Analysts’ forecasts
Based on the average prediction of the 15 analysts covering the stock, the answer to this question is… no!
The most optimistic ‘expert’ is expecting EPS of 10.33 cents (8.88p) for the 2024 financial year, and 12.16 cents (10.46p) for 2025.
Based on its current P/E ratio, it means Vodafone’s share price could fall in the short term to 67p. But it could reach 78p by the end of 2025, still a long way short of £1.
The most pessimistic forecast suggests a share price of less than 50p in 2025.
| Measure | 2023 (actual) | 2024 (forecasts) | 2025 (forecasts) |
| Adjusted profit after tax (€bn) | 3.17 | 1.52-2.89 | 1.90-3.37 |
| Adjusted earnings per share (€ cents) | 11.45 | 7.51-10.33 | 7.10-12.16 |
Ringing the changes
The new management team is aware of the need to grow revenue and earnings.
The company has embarked on a €1bn cost savings programme that will see it shed 11,000 employees over the next three years.
And the recently announced merger of Vodafone’s UK operations with Three, is expected to lead to €700m of annual cost and capital synergies within five years of the deal being concluded.
But the impact of these moves will not be felt for several years. The share price is therefore unlikely to move from its current level unless something significant happens.
Some have speculated that it might become a takeover target. But despite its current problems, Vodafone remains a large company and any deal is likely to be challenged by Europe’s competition authorities. I therefore think a takeover is unlikely.
My analysis assumes that the company’s current P/E ratio of 7.5 is reasonable. It’s higher than BT‘s (5.8) but lower than Airtel Africa‘s (7.9) — the two other telecoms companies in the FTSE 100. But it’s not too out of kilter.
Verdict
As hard as it is for me to write, I think Vodafone’s shares are probably fairly priced at the moment. Unless some of the changes identified above start to take effect sooner, I don’t see the stock returning to £1 for several years yet.
Also, I fear the dividend is presently unsustainable — not many companies of this size have a yield above 10%. And if a cut is announced, there will be further downwards pressure on the share price.
