Vodafone Group (LSE: VOD) (NASDAQ: VOD.US) published its final results this morning. Remarkably, the firm revealed adjusted earnings per share of 17.5p — an impressive 30% higher than analysts’ consensus forecasts of 13.5p.
Despite this apparent ‘beat’, Vodafone shares are down by more than 4% as I write. So what’s happened?
Selective adjustments
Vodafone’s apparent outperformance definitely wasn’t due to a recovery in its core European markets, where organic revenues fell by 9.1% last year. Nor was it due to profits from the Verizon Wireless sale, which were sensibly excluded from adjusted profits.
Indeed, Vodafone rigorously adjusted out all of last year’s exceptional losses and gains, but it left in one key item, which changes the picture completely, in my opinion.
Last year’s adjusted profits were calculated including five months’ of earnings from Vodafone’s share in Verizon Wireless, covering the period from April to September, when the Verizon deal was announced.
In accounting terms, that’s fair enough, but it means that Vodafone’s adjusted earnings do not represent the underlying earnings from its continuing business — which is the typical use for adjusted figures.
Vodafone’s share of Verizon Wireless earnings accounted for £3.2bn of the firm’s £7.9bn adjusted operating profit last year. Choosing to include this large profit from a discontinued business has enabled Vodafone to report adjusted earnings per share of 17.5p, placing its shares on an apparently appealing P/E ratio of about 12.
However, by my reckoning, Vodafone’s adjusted earnings per share excluding Verizon Wireless were around 10.5p last year, which makes Vodafone’s shares look very expensive, at more than 200p.
Indeed, analysts’ consensus forecasts for 2014/15 take an even more bearish view — the current consensus (average) forecast is for earnings of just 8.5p per share, which equates to a forecast P/E ratio of 24!
Saved by the dividend?
Luckily, Vodafone’s valuation is likely to remain supported by its dividend. Today’s results confirmed that the total payout for this year will be 11p per share, which equates to a yield of 5.3% at the current share price of 208p.
This dividend will cost around £2.9bn this year, an amount Vodafone can afford to subsidise from its £10bn cash balance for several years, if necessary.
Hold Vodafone?
Vodafone is planning to invest around £19bn in its networks over the next two years, and I expect that this, combined with recent acquisitions, will deliver steady levels of growth.Â