At first glance, the past year hasn’t been great for the FTSE 100. The index is up 5% over 12 months, excluding cash dividends. Add in these payouts and the return jumps to 9%. Not bad, but lower than the S&P 500‘s 14% one-year return.
The FTSE 100 is deeply undervalued
After a 3.8% fall since 20 September’s close, the Footsie is deep into value territory yet again. It trades on a multiple of 10.9 times earnings, for an earnings yield of 9.1%. This means that its dividend yield of 3.9% a year is covered a healthy 2.3 times by earnings.
Based on these fundamentals, the UK’s main market index looks chronically undervalued to me, both in historical and geographical terms. Even worse, some of its constituent shares have performed terribly in 2022/23, including a few of my holdings.
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A Footsie flop
For example, one FTSE 100 share that my wife and I own in our family portfolio and that has crashed over 12 months is Vodafone Group (LSE: VOD), the global telecoms giant.
Vodafone is Europe’s largest operator of mobile and fixed networks. It also has the continent’s biggest and fastest-growing 5G network. In total, it has 300m mobile customers, 27m fixed broadband customers, and 22m TV customers.
Vodafone’s decline
Despite this market strength, Vodafone stock has performed poorly for years. At the current share price of 75.58p, the group is valued at just £20.5bn. That’s a fraction of its worth in 2000, when it was valued at around 10 times this level.
So far in 2023, Vodafone shares have lost 10.4% of their value. Also, they are down 28% over one year and 52.8% over five years. What a painful destruction of value for long-suffering shareholders.
At its 52-week high, Vodafone stock briefly hit 108p a share on 8 November 2022. A month later, we bought these sagging shares at 89.4p a share. The price then crashed as low as 69.73p on
11 July, before rebounding to current levels.
This means that we are sitting on a paper loss of 15.5% of our investment, which isn’t ideal. Furthermore, Vodafone shares are the FTSE 100’s fourth-worst performer over 12 months. Yikes.
New broom, new recovery?
After at least a decade of decline, is there any light at the end of the tunnel for Vodafone’s owners? Or will the shares continue to decline? Personally, I think the arrival of new CEO Margherita Della Valle in April 2023 might signal a turning point for the ailing group.
In her first market statement, Della Valle said, “To realise our potential, Vodafone needs to change. We know we can do better. My focus will be to improve the service for our customers, simplify our business and grow”.
Another positive sign is that this FTSE 100 firm’s balance sheet is strengthening. Net debt has fallen by almost a fifth (down 19.7%) to €33.4bn, from €41.6bn a year earlier.
Lastly, Vodafone’s ongoing attraction for me is its chunky dividend yield of 10.4% a year. However, future dividends are not guaranteed, so Della Valle may cut this payout to invest in recovery and growth. Meanwhile, my hope is for a sustained recovery in group revenues, earnings, and cash flow!
