FTSE 100 stalwart Vodafone (LSE:VOD) has endured a challenging year. The firm’s shares are down 27% amid concerns about earnings, the business’s direction, and substantial debt.
It’s worth remembering that Vodafone was actually once the darling of the blue-chip index. It had a valuation around a quarter of a trillion pounds at the peak of the dotcom boom.
But now trading with a market-cap of £17.2bn, down 53% in the last five years, is it time to consider investing in Vodafone for its huge 12.4% dividend yield?
The business
Vodafone is a multi-national communications giant. Before the pandemic, it ranked as the world’s eighth largest communications company by market-cap. Nowadays, it remains a top-10 communications company by revenue — €45.7bn in 2023 — but not by valuation.
The firm predominantly operates services in Asia, Africa, Europe, and Oceania, employing over 100,000 people. In addition to conventional communication services, it also operates a series of smaller businesses, including M-PESA — an Africa-focused payments solution.
A fall from grace
Clearly, the business hasn’t been moving in the right direction in recent years. Debt surged and the communications market has become increasingly competitive. Vodafone, and its larger peers including BT, have been partially hamstrung by the need to continually invest and upgrade telecommunications infrastructure.
Costs have increased, the cost of servicing debt has increased, and younger competition doesn’t appear to have these issues. And amid a period of higher interest rates, Vodafone really hasn’t had much room to manoeuvre.
On the upside, net debt now stands at €36.2bn, down from €45.6bn a year ago. The board clearly has been listening to investors and their debt concerns. Over the past 18 months, this has been facilitated by the sale of the Hungarian arm for €1.7bn as well as Vantage Towers for €8.61bn and operations in Ghana for €689m.
The bottom line
Is Vodafone worth investing in? Can it turn around its poor trajectory and continue to pay its extraordinarily strong dividend?
Well, while adjusted earnings may be impacted by more business unit sales, it’s clear that the below earnings per share (EPS) forecast — this is the consensus — suggests that its current 7.68p dividend is unaffordable.
| 2024 | 2025 | 2026 | |
| Basic EPS (p) | 4.3 | 6 | 6.8 |
| P/E | 14.7 | 10.5 | 9.3 |
In short, dividend payments will have to be brought in line with earnings. Analysts see the dividend falling to 7p in 2025, but I imagine it may have to fall further after recent downward revisions to the earnings forecast.
As such, with a dividend coverage ratio under one — the company’s basic earnings are less than stated dividend — it’s not sustainable.
From a valuation perspective (as illustrated by the price-to-earnings (P/E) ratios above), Vodafone looks slightly more expensive than its peers.
The real investment hypothesis here would have to revolve around the company’s ability to change its fortunes, in a manner similar to Rolls-Royce.
I certainly wouldn’t bet against this happening, especially as interest rates fall, but I’d need some hard evidence before putting my own money there.
