Investors in Vodafone Group (LSE: VOD) (NASDAQ: VOD.US) haven’t had a bad decade — I calculated recently that a £10,000 investment at the end of September 2004 would be worth more than £23,000 a decade later, including the Verizon payment and with all dividends reinvested.
Price down
But a first glance at the share price chart shows that Vodafone shares are down 22% in price since the beginning of 2014, to 193p as I write, so what has gone wrong?
Well, the truth is nothing, because the share price chart is misleading.
You see, in February and March, Vodafone handed out 72p per share in cash plus Verizon Communications shares, as part of the sale of its stake in Verizon Wireless, and the value of those needs to be considered too in order to work out how well a Vodafone investment has actually done this year.
The total value of the return was rated at 102p per share, so there’s an effective valuation today of 295p per share over all — today’s price plus that 102p. Vodafone shares ended December 2013 at 247p, so we’re actually looking at a gain of 48p per share, or 19%, so far this year — and that soundly beats the FTSE 100‘s loss of 6%.
We have a winner
So while the share price itself is lagging the index, adjusted for the Verizon deal it looks like Vodafone should easily end the year as a winner — unless something happens that might trigger a re-rating!
The problem is that Vodafone shares are on a forward P/E of 30 based on current forecasts, and that’s with a fall in earnings per share of more than 60% expected. And though there’s a 6% dividend yield predicted, it’s not going to be covered by earnings, and that’s making the shares look pricey.
But we’re in a period of transition, and Vodafone is looking to flex its financial muscle by pursuing big investment in its current business and acquisitions. And with Vodafone, acquisition targets are likely to be big!
Target?
Then, of course, there’s always a chance it could go the other way and we could see Vodafone being eyed up as a takeover target by an even bigger fish — earlier in the year there were rumours that AT&T might be interested, but nothing has come of it.
Overall, then, Vodafone is a very tricky one to value — but shareholders should at least be on for a profitable 2014.