How Much Lower Can Vodafone Group plc Go?

Since Vodafone (LSE:VOD) (NASDAQ:VOD.US) sold its share of Verizon Wireless earlier this year, the company’s share price has gone nowhere but down. 

Unfortunately, this downtrend has only accelerated recently, after the company released a poor set of results for the year ended March 2014.

With the company’s share price down nearly a quarter since the beginning of this year, how much lower can Vodafone go?

Falling earnings 

Vodafone’s outlook completely changed when the company sold its holding of Verizon Wireless. Indeed, the joint venture had been an integral source of income for Vodafone, some years boosting the company’s bottom line by more than 50%.

But now, without the contribution from Verizon, Vodafone’s earnings are forecast to collapse 60% this year. Specifically, Vodafone is expected to report earnings per share of 7p for this year, over the past five years the company has reported average earnings per share of 17p.

With earnings set to slide, Vodafone is now trading at a forward P/E of 28, a valuation more akin to a high-growth tech company. Sadly, Vodafone is not a high-growth company, earnings are only expected to expand 1% by 2016.

Overvalued

How do these falling earnings reflect on Vodafone’s results? Well, during the past five years Vodafone has traded at an average multiple of 11 times historic earnings.

Unfortunately, with earnings per share of 7p forecast for this year, if Vodafone was to revert back to its mean valuation, the company’s shares would be worth as little as 77p. 

Still, the company’s hefty dividend payout of 11.4p per share, a yield of 5.7%, rising to 11.8p next year is attractive. Hopefully, this dividend will stop the shares falling much lower.

However, as you may have spotted from the figures above, Vodafone’s a payout of 11.4p per share is not covered by earnings. Nevertheless, looking at Vodafone’s cash flows it would appear that the dividend payout is here to stay. 

Cash flow king

In business, cash is king and cash flow statements often reveal more about a company than income statements.

For example, cash flows statements are difficult to manipulate by aggressive accounting techniques. Additionally, cash flows are not impacted by non-cash charges, some of which have very little effect on the underlying business. 

Vodafone’s cash flow statement shows us that last year the company’s total dividend payout cost the company £5.1bn. In comparison, during the year the company generated £6.2bn cash from operations.

So, it would appear that for the time being at least Vodafone’s dividend payout is secure.