Up until a year or so ago, Vodafone (LSE: VOD) (NASDAQ: VOD.US) was the apple of many a growth investor’s eye — even with a market cap of over £50bn, the firm’s march across the developing globe looked set to continue.
But takeover fever took people’s minds off the things that really matter, and the company behind the hype is looking a little vulnerable. I had Vodafone in the Fool’s Beginners’ Porfolio, but I reckoned it was looking overvalued and I sold in December 2013 — the shares are down 17% since then, to 194p.
Here are three reasons why I would still be selling today:
1. Massive valuation
 Shares with great potential often trade on price to earnings (P/E) ratios ahead of the FTSE 100’s long-term average of around 14, but typically that’s when we have forecasts for strong growth in earnings per share (EPS) — growth that would chip away at the P/E and bring it back down in the long term.
And I do think that Vodafone shares should command a higher-than-average P/E, even if a return to growth might be a couple of years away.
But 2014 forecasts, which suggest an EPS fall of 60% following on from a 13% drop in 2013, put them on a forward P/E of 29. And a 5% earnings growth in 2015 would only bring that down to a bit under 28. Twice the FTSE average is too high.
2. Unreliable dividends
Vodafone’s growth ambitions were backed by its commitment to rising dividends — we saw a nice yield of 5% in 2013. But the company downgraded its stance that year “at least to maintain the ordinary dividend per share at current levels“. With this year’s results we did hear talk of “our intention to continue to grow dividends“, but what does the near future hold?
There’s a 6% yield forecast for the year to March 2015, but forecast earnings should only cover about 60% of that — and the 2016 picture is similar.
At a time when cash is needed for technological development, I reckon those dividends are unsustainable.
3. Takeover rumours
Takeover rumours are a reason to sell? Well, I’d say the share price is still pumped up from all of the rumours, and it overvalues the company on fundamentals.
Now, someone might want worldwide domination enough to pay inflated prices for Vodafone shares and you might make a profit if you buy now. But they might not, and buying on the hope of a takeover is nothing more than a gamble.
On fundamentals, I reckon Vodafone shares are overpriced.