Every weekend I buy a copy of the Financial Times and look at the valuation metrics of UK stocks, particularly those in the FTSE 100. The edition for 4-5 November 2023 reports that the price-to-earnings (P/E) ratio of Vodafone (LSE:VOD) stock is currently 2.1. And the newspaper claims that it’s currently yielding a very appealing 10%.
Figures like these suggest that the stock of the telecoms giant is currently the biggest bargain in the Footsie. Although correct, these metrics are potentially misleading. On closer inspection, a famous quotation comes to mind: “There are three kinds of lies: lies, damned lies and statistics“.
Here’s why.
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Out of date
The P/E ratio is based on the accounts for the year ended 31 March 2023, which reported after-tax earnings of €11.84bn (£10.27bn at current exchange rates). With a market cap of £21.3bn, it’s true that the stock is trading at twice earnings.
However, the 2023 result was distorted by one-off gains from the disposal of Vantage Towers (€8.61bn) and its operations in Ghana (€689m). A small loss was also incurred following a decision to exit the market in Hungary (€69m).
Removing these figures gives an adjusted profit after tax of €2.61bn (£2.26bn) and a revised P/E ratio of 8.2. Despite falling 45% since November 2018, this makes Vodafone’s stock more expensive than BT‘s.
But it’s future earnings that matter.
According to the average of company-compiled forecasts from nine analysts covering the stock, earnings for 2024 are expected to be €2.44bn (£2.12bn). If correct, the P/E ratio is pushed even higher to 8.7.
This implies that Vodafone’s stock is more expense than, for example, that of BP, HSBC, and British American Tobacco.
Distributions to shareholders
And I think Vodafone’s headline double-digit dividend yield must also be treated with caution.
For the past six years, the company has paid a dividend of 9 euro cents (7.81p) a share. Based on the current share price, that’s a yield of 10% — identical to the figure reported by the Financial Times.
But due to stagnant revenue and falling earnings, the same analysts referred to above are expecting a dividend of 7.35 cents (6.38p) for the 2024 financial year. This gives a current yield of 8.1%. Still above the FTSE 100 average of 3.9%, but not as impressive as some figures that have been quoted.
On balance, I think Vodafone will maintain its dividend this year. It recently announced the sale of its operations in Spain which should generate “at least” €4.1bn in cash. Last year’s payout cost €2.4bn. If the disposal is concluded, the company will have more than enough cash to pay 9 cents a share this year, without having to use any of its operating cash flow.
Delivering results
Shareholders (like me) will find out on 14 November 2023 how the company performed during the first six months of the 2024 financial year.
I’ll then be able to better judge whether Vodafone’s shares are the best bargain in the FTSE 100. But right now, I don’t think they are. There are other companies that are currently performing better, whose stocks are trading at lower multiples. And they are paying generous dividends.
This reinforces my belief that it’s important to look behind the headline numbers when making investment decisions.
