Picture supply: Vodafone Group plc
Vodafone’s (LSE: VOD) share worth has greater than halved prior to now 5 years.
A part of this got here from massive shocks to the monetary markets over the interval, together with Covid and rising inflation and rates of interest. The remainder may be attributed to a lacklustre efficiency by the corporate throughout that point.
Nevertheless, such an enormous fall in worth raises the query to me of whether or not the inventory is now an equally enormous discount.
Relative inventory valuation
My place to begin in answering that is to take a look at the way it charges on one of many key inventory measurements I take advantage of.
On the price-to-book ratio, Vodafone at the moment trades at simply 0.4 – backside of its group of rivals by a good distance. Extra particularly, Orange is at 0.9, BT Group at 1.1, Deutsche Telekom at 2.3, and Telenor at 2.8.
So it is rather low cost on this measure.
To translate this into money phrases, I used a reduced money circulate evaluation utilizing different analysts’ figures and my very own. This reveals the Vodafone shares at 74p to be a surprising 71% undervalued.
Due to this fact, the ‘honest’ worth could be £2.55 a share. Given the vagaries of the market, it would go decrease or increased than that. However it underlines how enormously undervalued the inventory seems.
What are the agency’s development prospects?
In the end, a agency’s share worth and dividend are pushed by it rising earnings within the years forward.
In 2023, then-new CEO Margherita Della Valle set out her plans to rework Vodafone. These revolved round simplifying the enterprise, enhancing buyer focus and investing in high-margin areas.
One 12 months on and its full-year 2024 outcomes of 14 Could confirmed development in all its markets throughout Europe and Africa. Natural service income development was 6.3% 12 months on 12 months.
Q1 of its new fiscal 12 months 2025 confirmed whole service income up 5.4% over the identical interval final 12 months. And working revenue jumped 42.9% to €1.5bn.
A key threat for Vodafone is that this reorganisation falters sooner or later. The brand new 10-year $1bn take care of Google introduced on 8 October could also be one other threat. It may conflict with the 10-year, $1.5bn partnership Vodafone launched with Microsoft in January if not managed fastidiously.
That mentioned, because it stands, consensus analysts’ estimates are that its earnings will develop by 22% annually to end-2027.
The large dividend yield bonus
Final 12 months, Vodafone paid a dividend of 9 euro cents (fastened at 7.6p). On the present share worth of 74p, this generates a stellar yield of 10.3%.
This is without doubt one of the highest returns in any FTSE index, with the FTSE 100 averaging 3.5% at the moment and the FTSE 250 at 3.3%.
£10,000 invested within the inventory at this price – with the dividends compounded – would make £17,888 over 10 years. After 30 years on the identical foundation, it might have made £206,892 in dividend returns.
That mentioned, for full-year 2024 to 31 March, the agency plans to chop the dividend in half earlier than aiming to extend it once more over time.
I have already got a number of high-yield shares and am very pleased with the costs I paid for them. If I didn’t have these, although, I might purchase Vodafone as we speak for its good yield, excessive undervaluation and glorious development prospects.
