After a long-term decline, the Vodafone (LSE:VOD) share price appears to have stabilised over the past year. At the time of writing (8 October), its 52-week range is 62.7p-79.5p.
This probably offers little comfort to those who invested (like me) when its share price was much higher. However, for long suffering shareholders I think there’s further evidence to suggest that the worst is behind us.
To help improve its performance and pay down some of its enormous borrowings, Vodafone has been selling off various divisions. It’s now sold its operations in Ghana, Hungary, Spain and Italy, as well as some of its European infrastructure assets.
This means it’s constantly restating its accounts to include only the parts of its business that it intends to retain (continuing operations). This allows a direct comparison to be made from one period to another, but it doesn’t reflect the group’s actual historical financial performance.
Revisiting history
The table below summarises earnings per share, as reported in Vodafone’s accounts when they were published. The figures haven’t been adjusted to reflect any subsequent disposals. By removing this distortion, it’s possible to see how investors valued the group at the time.
| Measure | FY20 | FY21 | FY22 | FY23 | FY24 |
|---|---|---|---|---|---|
| Adjusted basic earnings per share (€ cents) | 5.60 | 8.08 | 11.03 | 11.45 | 7.47 |
| Adjusted basic earnings per share (pence) | 4.96 | 6.88 | 9.30 | 10.07 | 6.40 |
| Share price (pence) | 113 | 132 | 125 | 89 | 70 |
| Price-to-earnings ratio | 22.8 | 19.2 | 13.4 | 8.4 | 10.9 |
At the end of its 31 March 2020 financial year (FY20), the group was valued at 22.8 times that period’s earnings. This multiple fell over the next three years to a low of 8.4, at the end of FY23. Investors were prepared to pay less for each euro of earnings.
I’m sure some of this decline can be attributed to global economic conditions that damaged investor confidence during this period.
However, I suspect it was also caused by concerns about the lack of growth. Revenue in FY23 was only 1.6% up on FY20.
Importantly, its return on capital was falling during this period. It had to spend heavily on infrastructure but wasn’t reaping rewards. And in three key markets — the UK, Spain and Italy — the rate of return was less than the cost of these operations.
All change
That’s why the company appointed a new CEO in April 2023, who quickly set about completing the sale of the group’s Mediterranean businesses.
And based on FY24 results, sentiment towards it appears to be improving.
At 31 March 2024, its shares were trading on a historic price-to-earnings (P/E) ratio of 10.9. Since then, it’s edged up slightly to 11.5.
And its net debt was €10bn (20.9%) lower than at the end of FY20.
Its Q1 FY25 trading update reported an increase in revenue of 2.8%, and a rise of 2.1% in its preferred earnings measure, compared to the same period in FY24. However, as expected, due to a change in the way TV contracts are sold, revenue in Germany fell.
My verdict
In my opinion, there are sufficient green shoots to suggest that Vodafone’s moving in the right direction.
If more investors can be convinced that the company’s turnaround plan is working, the earnings multiple could return closer to previous levels, with some major implications.
For example, if the P/E ratio at 31 March 2020 was applied to the group’s FY24 earnings, it would have a share price of 146p — a 98% premium to today’s figure.
I’d be happy with that.
