I’ve been concerned about Vodafone (LSE: VOD) for some time now. To be specific, three aspects of the company have had me scratching my head for years.
Dividends
One was its dividends, which were up in the 6-7% range in terms of yields for years, even though the level of cash wasn’t even close to being covered by earnings.
I claim no prescience in foreseeing the cut when it finally came, when the telecoms giant announced it was “rebasing” its dividend with a reduction of 40% for the year to 31 March, as I was far from alone in just not understanding how it could be sustained.
What I really couldn’t grasp was how so many (including City pundits who just kept parroting last year’s dividend as next year’s forecast) couldn’t see it coming, and what I saw as a clear overvaluation of Vodafone shares as a result.
Overvaluation
And that’s my second thing, the share price valuation. Vodafone shares spiked way back in the days of takeover fever, but even though the outlook for a bid for the company became more and more bleak, the share price held stubbornly high.
But the markets finally started to accept that Vodafone shares could not defy logic forever. Ever since the end of 2017, they’ve been on a slide, having now lost almost half their value. Even today, after that crash, we’re still looking at a forecast P/E of nearly 17, with a dividend that’s still not expected to be covered by earnings.
At its peak, the Vodafone share price was commanding P/E ratios of around 40, at a time when rival BT Group was close to the long-term Footsie average at 14.
Big picture
And then the third thing, the gestalt of it all. And that’s just a fancy word for the perception that whole should be more than the sum of its parts. But as far as I could see, Vodafone wasn’t. And isn’t.
I can see a collection of international operations, selling various technology and services as appropriate to different markets. But I just haven’t seen a joined-up whole that’s any more than that. And I still see no justification for a premium valuation.
Even the start of that 5G mobile thingy hasn’t excited the communicating masses the way previous Gs have. The young members of my family whose thumbs are pretty much glued to those infernal devices don’t appear to be interested, not really seeing what they’ll realistically get from it. People are, and it comes as no surprise to me, just not upgrading their phones as often as they used to.
What now?
So what about Vodafone shares now? On today’s fallen share price, that P/E of 17 still doesn’t strike me as a bargain. Though the dividend has been seriously cut, the share price fall has boosted its yield back up to around 7%. But we’re still looking at a lack of cover by earnings.
And I find myself looking at a company whose overall direction is hard to understand, whose net debts stand at a massive €27bn, and which is paying out dividends that still look unsupportable and unsustainable. In short, nothing has really changed, and I’m still steering well clear.