Vodafone (LSE: VOD) (NASDAQ: VOD.US) has been a pretty mixed investment of late, with takeover bids grabbing the attention ahead of the company’s usual day-to-day business. And the share price has fallen so far in 2014 after rumours of a bid from AT&T have faded.
But its been an unusual few months, and looking back further we see a share price rise of 8% over the past 12 months beating the FTSE 100’s 3% — and over five years the Vodafone price has gained 80% compared to the FTSE’s 55%. At the same time, Vodafone has been enriching its shareholders with dividend yields of around 5%.
Fundamentals
So, putting the acquisition wars aside, what might Vodafone be worth in another five years?
We’re expecting a big fall in earnings per share (EPS) for the year to March 2015 after a 13% fall in the year just ended, with a few years of pretty big investment on the cards. In the short term at least, that will affect the security of Vodafone’s dividend — for the next few years, it’s just not going to be covered by earnings.
Vodafone has famously downgraded its dividend plans, and now hopes only to at least equal the previous year’s payout each year — and there’s nothing to stop the company lowering its intentions from that.
Dividends safe? Hmm…
But ignoring that possible concern, forecasts don’t anticipate anything drastic happening to the dividend over the next few years.
With EPS of just 8p predicted for 2015, at 210p the shares are on a forward P/E of a pretty big 26 — the FTSE’s long-term average is only 14. Looking forward, there’s a tentative guess of 13.5p EPS by March 2019, and that would still be less than 2014’s figure.
If we expect the shares to revert to the norm P/E of 14, that would suggest a price of 189p by March 2019 — 21p less than today!
There are dividends, although we have to ignore the lack of cover if we’re to take forecasts at face value. If we do, we could expect to add 61p per share to the pot for a total return of 250p — but that’s still a gain of only 19% over five years.
It just looks overvalued
For some reason, 13 out of 28 brokers are urging us to buy Vodafone shares, with only three saying we should sell – they must be mad!
There’s surely hope for further bids built into the share price today, but I reckon buying shares in the hope of a takeover is a mug’s game — and I’m still happy I dumped Vodafone from the Beginners’ Portfolio for a nice profit back in December 2013.