The Vodafone (LSE: VOD) share price has put shareholders through a painful five years, falling 55%.
The telecom giant’s turnaround plans have been ambitious. But what we really need is actual financial improvement, starting with revenue. And with a Q3 update on Tuesday (4 February), we might just be seeing the start of that.
What we know
“Group service revenue growth accelerated to 5.2% in the third quarter. This was driven by a step-up in the UK and strong performance in Türkiye and Africa, whilst Germany is impacted by the TV law change.”
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Those are the words of CEO Margherita Della Valle, who went on to say: “We are on track to grow in line with our full-year guidance for this year, which we reiterate today.” That guidance suggests annual adjusted EBITDAaL (EBITDA tweaked for some non-standard measures) of approximately €11bn (£9.2bn). Adjusted free cash flow should be at least €2.4bn (£2.0bn).
The company has hit a few key milestones. The disposal of Vodafone Italy completed in December, with some of the €8bn cash going to reduce debt. There’s also a further share buyback on the cards.
The merger with Three received Competition and Markets Authority approval in December, and should complete in the next few months. But it could take a while to see how smoothly the integration goes. In past years, I’ve seen poor integration between Vodafone’s various businesses as one of its key weaknesses.
What it means
Does all this mean we should consider buying Vodafone shares now? Let’s check valuations. We’re looking at a forecast price-to-earnings (P/E) ratio of 12 for this year, dropping to under nine by 2027. That starts a bit above BT Group’s multiple of 10, but that’s also expected to drop to around nine.
Net debt is similar, and massive at over £20bn in both cases. But Vodafone’s market cap, at £18bn, is around 30% ahead of BT. On the debt score, I’d say Vodafone looks a bit better, but not by a lot.
The whole cash/debt/dividend/buyback approach is the thing that concerns me most. Vodafone has completed €1.5bn in share buybacks so far this year, and has plans for up to another €2bn. And the dividend, despite being slashed this year, is back above 6% after the share price fall.
What next?
Vodafone and BT have been doing this for years. They’ve been paying dividends, going big on capital expenditure, and building up massive debts. Shareholders have pocketed dividends, but they’ve paid for it in the share price.
The Vodafone share price has fallen 70% in the past 10 years. And even adjusted for returns, investors are down 50%. Vodafone, over the past decade, has been destroying shareholder value.
Saying that, I’m cautiously optimistic that the company really can turn things round. And I do think the current year could be a pivotal one. I reckon investors, especially those aiming for long-term dividend income, could do well to consider it. Personally, I’ll wait for the proof of the pudding, with FY results due on 20 May.
