An awful lot of investors find the Vodafone (LSE: VOD) share price incredibly hard to resist at today’s low, low levels. So far, I have resisted the temptation to dive in and add the stock to my portfolio. Is it time for a rethink?
In many respects, Vodafone should be my ideal stock. It’s a fixture on the FTSE 100, the share price is cheap after years of underperformance, and it offers a world-class dividend yield.
Vodafone is forecast to yield 9.66% in 2024 and 9.75% in 2025. Those are stunning rates of income, assuming investors get them. But there’s a danger they won’t.
Vodafone has been struggling to generate enough cash to pay its mighty dividend, which cost it a thumping €2.5bn in 2023. Adjusted free cash flow fell 11% last year to €4.8bn and it’s expected to slide again, to €3.3bn in 2024.
Wrong call
In 2023, operating profit jumped 145.9%, from £5.8bn to £14.3bn year. While it’s good to see Vodafone back in profit, as it made losses in 2016, 2017, 2018 and 2019, the big jump was mostly down to spinning off and selling Vantage Towers.
Group revenue rose just 0.3% to £45.7bn, and that’s expected to dip in 2024 to £43.6bn. The board can’t keep relying on disposals to keep the money coming in. Plans to cut 11,000 jobs will help but, again, it needs to do more.
The dividend has been frozen at 9 euro cents for years. It’s only yielding so much because the share price is such a horror show, crashing 26.19% over one year and 52.19% over five.
It has been showing signs of life lately, jumping 12.31% in the last month, racing ahead of the FTSE 100 which grew ‘just’ 4.14% over the same period. Promising Q1 figures helped with group service revenue up 3.7% to €10.7bn.
Everything boils down to how well new CEO Margherita Della Valle pursues her turnaround plan. She’s certainly aware of the problems, opening her tenure stating that “performance has not been good enough”.
Much depends on Germany, a key market for Vodafone, which worries me given the problems afflicting Europe’s powerhouse economy.
Don’t forget the debt
In the longer run, Vodafone has a huge market to aim at. It’s Europe’s largest mobile network operator with a strong presence in India and growing operations in Africa. Yet it faces challenges to match, as its IT systems have struggled to keep pace with regulatory changes, while underwhelming network performance has hit customer satisfaction, increasing churn.
Markets expect the dividend per share to hold firm for a couple of years, whatever happens, but I remain wary. To be fair, a dividend cut is hardly the end of the world. Vodafone could slice its payout in half and investors would still get 4.5%.
I still think Vodafone and its new CEO have too many problems on their plate. It still has net debt of €33.4bn, and that’s despite paying off €8.2bn last year. And it’s not even that cheap, trading at 14 times earnings for 2024.
So I won’t be buying this stock. Instead, I will focus on other FTSE 100 high yielders with fewer challenges.
